The Issue Whether Petitioners' proposed rates are justified pursuant to the requirements of Section 627.062, Florida Statutes, or whether the Department of Financial Services, Office of Insurance Regulation (OIR) was correct in denying the requested rate increases.
Findings Of Fact The Hartford companies are property and casualty insurers transacting insurance in the State of Florida pursuant to valid certificates of authority and the Florida Insurance Code. Two types of personal lines insurance filings submitted by Hartford to the OIR are at issue in this proceeding: two filings for homeowners insurance (Case Nos. 07-5185 and 07-5186) and two filings for dwelling fire insurance (Case Nos. 07-5187 and 07- 5188). Hartford's substantial interests are affected by the notices disapproving the filings in this case. Homeowners insurance includes coverage for a variety of perils in and around a home, is usually purchased by a homeowner, and covers both the structure and the contents of a home. Dwelling/fire insurance is usually purchased by the owners of properties that are leased or rented to others, and provides coverage for the structure only. Both types of insurance cover damage caused by hurricanes. The New Legislation and its Requirements In a special session held in January 2007, the Florida Legislature enacted changes to the Florida Hurricane Catastrophe Fund (CAT Fund), as reflected in Chapter 2007-1, Laws of Florida. The special session was precipitated by a perceived crisis regarding the cost and availability of homeowners insurance after the 2004 and 2005 hurricane seasons. As a result of the substantial number of claims incurred after multiple severe hurricanes each of these years, changes in the insurance marketplace resulted in some insurance companies withdrawing from the Florida market, others non-renewing policies, one company becoming insolvent, and the cost for reinsurance available to all insurers rising dramatically. One of the primary features of the legislation was an expansion of the CAT Fund. The CAT Fund was established in 1993 after Hurricane Andrew to provide reinsurance to insurers for property insurance written in Florida at a price significantly less than the private market. The CAT Fund is a non-profit entity and is tax exempt. Prior to the enactment of Chapter 2007-1, the CAT Fund had an industry-wide capacity of approximately $16 million. The purpose of the changes enacted by the Legislature was to reduce the cost of reinsurance and thereby reduce the cost of property insurance in the state. As a result of Chapter 2007-1, the industry-wide capacity of the CAT Fund was increased to $28 billion, and insurers were given an opportunity to purchase an additional layer of reinsurance, referred to as the TICL layer (temporary increase in coverage limit), from the CAT Fund. Section 3 of Chapter 2007-1 required insurers to submit a filing to the OIR for policies written after June 1, 2007, that took into account a "presumed factor" calculated by OIR and that purported to reflect savings created by the law. The new law delegated to the OIR the duty to specify by Order the date such filings, referred to as "presumed factor filings" had to be made. On February 19, 2007, the OIR issued Order No. 89321-07. The Order required insurers to make a filing by March 15, 2007, which either adopted presumed factors published by the OIR or used the presumed factors and reflected a rate decrease taking the presumed factors into account. The presumed factors were the amounts the OIR calculated as the average savings created by Chapter 2007-1, and insurers were required to reduce their rates by an amount equal to the impact of the presumed factors. The OIR published the presumed factors on March 1, 2007. In its March 15, 2007, filings, Hartford adopted the presumed factors published by OIR. As a result, Hartford reduced its rates, effective June 1, 2007, on the products at issue in these filings by the following percentages: Case No. 07-5185 homeowners product: 17.7% Case No. 07-5186 homeowners product: 21.9% Case No. 07-5187 dwelling/fire product: 8.7% Case No. 07-5188 dwelling/fire product: 6.2% The Order also required that insurers submit a "True-Up Filing" pursuant to Section 627.026(2)(a)1., Florida Statutes. The filing was to be a complete rate filing that included the company's actual reinsurance costs and programs. Hartford's filings at issue in these proceedings are its True-Up Filings. The True-Up Filings Hartford submitted its True-Up filings June 15, 2007. The rate filings were certified as required by Section 627.062(9), Florida Statutes. The filings were amended August 8, 2007. Hartford's True Up Filings, as amended, request the following increases in rates over those reflected in the March 15, 2007, presumed factor filings: Case No. 07-5185 homeowners product: 22.0% Case No. 07-5186 homeowners product: 31.6% Case No. 07-5187 dwelling and fire product: 69.0% Case No. 07-5188 dwelling and fire product: 35.9% The net effects of Hartford's proposed rate filings result in the following increases over the rates in place before the Presumed Factor Filings: Case No. 07-5185 homeowners product: .4% Case No. 07-5186 homeowners product: 2.8% Case No. 07-5187 dwelling/fire product: 54.3% Case No. 07-5188 dwelling/fire product: 27.5% Case Nos. 07-5185 and 07-5186 (homeowners) affect approximately 92,000 insurance policies. Case Nos. 07-5187 and 07-5188 (dwelling/fire) affect approximately 2,550 policies. A public hearing was conducted on the filings August 16, 2007. Representatives from Hartford were not notified prior to the public hearing what concerns the OIR might have with the filings. Following the hearing, on August 20, 2007, Petitioners provided by letter and supporting documentation additional information related to the filings in an effort to address questions raised at the public hearing. The OIR did not issue clarification letters to Hartford concerning any of the information provided or any deficiencies in the filings before issuing its Notices of Intent to Disapprove the True-Up Filings. All four filings were reviewed on behalf of the OIR by Allan Schwartz. Mr. Schwartz reviewed only the True-Up Filings and did not review any previous filings submitted by Hartford with respect to the four product lines. On September 10, 2007, the OIR issued Notices of Intent to Disapprove each of the filings at issue in this case. The reasons give for disapproving the two homeowners filings are identical and are as follows: Having reviewed the information submitted, the Office finds that this filing does not provide sufficient documentation or justification to demonstrate that the proposed rate(s) comply with the standards of the appropriate statute(s) and rules(s) including demonstrating that the proposed rates are not excessive, inadequate, or unfairly discriminatory. The deficiencies include but are not limited to: The premium trends are too low and are not reflective of the historical pattern of premium trends. The loss trends are too high and are not reflective of the historical pattern of loss trends. The loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. The loss trends are excessive and inconsistent compared to other sources of loss trends such as Fast Track data. The catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. The catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. The particular time period from 1992 to 2006 used to calculate these values has not been justified. There has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. The underwriting profit and contingency factors are excessive and not supported. Various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. The underwriting expenses and other expenses are excessive and not supported. The non-FHCF reinsurance costs are excessive and not supported. The FHCF reinsurance costs are excessive and not supported. The fact that no new business is being written has not been taken into account. No explanation has been provided as too [sic] Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. As a result of the deficiencies set forth above, the Office finds that the proposed rate(s) are not justified, and must be deemed excessive and therefore, the Office intends to disapprove the above-referenced filing. The Notices of Intent to Disapprove the two dwelling/fire filings each list nine deficiencies. Seven of the nine (numbers 1-6 and 8) are the same as deficiencies listed for the homeowners filings. The remaining deficiencies named for Case No. 07-5187 are as follows: 7. The credibility standard and credibility value are not supported. 9. No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%. The deficiencies listed for Case No. 07-5188 are the same as those listed for Case No. 07-5187, with the exception that with respect to deficiency number 9, the rate change implemented for the program in Case No. 07-5188 from 2001 to 2006 was a decrease of about -3%. Documentation Required for the Filings Florida's regulatory framework, consistent with most states, requires that insurance rates not be inadequate, excessive, or unfairly discriminatory. In making a determination concerning whether a proposed rate complies with this standard, the OIR is charged with considering certain enumerated factors in accordance with generally accepted and reasonable actuarial techniques. Chapter 2007-1 also amended Section 627.062, Florida Statutes, to add a certification requirement. The amendment requires the chief executive officer or chief financial officer and chief actuary of a property insurer to certify under oath that they have reviewed the rate filing; that to their knowledge, the rate filing does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which the statements were made, not misleading; that based on their knowledge, the information in the filing fairly presents the basis of the rate filing for the period presented; and that the rate filing reflects all premium savings reasonably expected to result from legislative enactments and are in accordance with generally accepted and reasonable actuarial techniques. § 627.062(9)(a), Fla. Stat. (2007). Actuarial Standards of Practice 9 and 41 govern documentation by an actuary. Relevant sections of Standard of Practice 9 provide: Extent of documentation - . . . Appropriate records, worksheets, and other documentation of the actuary's work should be maintained by the actuary and retained for a reasonable length of time. Documentation should be sufficient for another actuary practicing in the same field to evaluate the work. The documentation should describe clearly the sources of data, material assumptions, and methods. Any material changes in sources of data, assumptions, or methods from the last analysis should be documented. The actuary should explain the reason(s) for and describe the impact of the changes. Prevention of misuse - . . . The actuary should take reasonable steps to ensure that an actuarial work product is presented fairly, that the presentation as a whole is clear in its actuarial aspects, and that the actuary is identified as the source of the actuarial aspects, and that the actuary is available to answer questions.. . . . * * * 5.5 Availability of documentation- Documentation should be available to the actuary's client or employer, and it should be made available to other persons when the client or employer so requests, assuming appropriate compensation, and provided such availability is not otherwise improper. . . . In determining the appropriate level of documentation for the proposed rate filings, Petitioner relied on its communications with OIR, as well as its understanding of what has been required in the past. This reliance is reasonable and is consistent with both the statutory and rule provisions governing the filings. Use of the RMS Catastrophic Loss Projection Model In order to estimate future losses in a rate filing, an insurer must estimate catastrophic and non-catastrophic losses. Hartford's projected catastrophic losses in the filings are based upon information provided from the Risk Management Solutions (RMS) catastrophic loss projection model, version 5.1a. Hartford's actuaries rely on this model, consistent with the standards governing actuarial practice, and their reliance is reasonable. Catastrophe loss projection models may be used in the preparation of insurance filings, if they have been considered by and accepted by the Florida Commission on Hurricane Loss Projection Methodology (the Hurricane Commission). The Hurricane Commission determined that the RMS model, version 5.1a was acceptable for projecting hurricane loss costs for personal residential rate filings on May 17, 2006. In addition to approval by the Hurricane Commission, use of the model is appropriate "only if the office and the consumer advocate appointed pursuant to s. 627.0613 have access to all of the assumptions and factors that were used in developing the actuarial methods, principles, standards, models, or output ranges, and are not precluded from disclosing such information in a rate proceeding." §627.0628(3)(c), Fla. Stat. Both the Consumer Advocate and a staff person from the OIR are members of the Hurricane Commission. In that context, both have the ability to make on-site visits to the modeling companies, and to ask any questions they choose regarding the models. Both OIR's representative and the Consumer Advocate participated in the meetings and had the same opportunity as other commissioners to ask any question they wished about RMS 5.1a. The Hurricane Commission members, including the Consumer Advocate, clearly have access to the information identified in Section 627.0628(3)(c). However, there are restrictions on the Hurricane Commission members' ability to share the information received regarding trade secrets disclosed by the modeling companies. For that reason, the Commission's deliberations are not, standing alone, sufficient to determine that the Office of Insurance Regulation has access. In this case, credible evidence was submitted to show that RMS officials met with staff from the Office in July and October 2006 to discuss the model. RMS offered to provide any of its trade secret information to the OIR, subject to a non- disclosure agreement to protect its dissemination to competitors. RMS also opened an office in Tallahassee and invited OIR staff to examine any parts of the model they wished. In addition, both RMS and Hartford have answered extensive questionnaires prepared by OIR regarding the RMS model, and Hartford has offered to assist OIR in gathering any additional information it requires. Most of the questions posed by OIR involve the same areas reviewed by the Commission. RMS' representative also testified at hearing that RMS would not object to disclosure of the assumptions during the hearing itself if necessary. Finally, OIR Exhibit 1 is the Florida Hurricane Catastrophe Fund 2007 Ratemaking Formula Report. The Executive Summary from the report explains how rates were recommended for the Florida Hurricane Catastrophic Fund (CAT Fund) for the 2007- 2008 contract year. The report stated that the RMS model, as well as three other models accepted by the Hurricane Commission, were used for determining expected aggregate losses to the CAT Fund reinsurance layer. Three models, including the RMS model, were also used for analysis of detailed allocation to type of business, territory, construction and deductible, as well as special coverage questions. The models were compared in detail and given equal weight. The report notes that these three models were also used in 1999-2006 ratemaking. The report is prepared by Paragon Strategic Solutions, Inc., an independent consultant selected by the State Board of Administration, in accordance with Section 215.555(5), Florida Statutes. While OIR did not prepare the report, they show no hesitation in accepting and relying on the report and the modeled information it contains in these proceedings. Indeed, one of OIR's criticisms is Hartford's failure to use the report with respect to CAT Fund loss recovery estimates. Based upon the evidence presented at hearing, it is found that the OIR and Consumer Advocate were provided access to the factors and assumptions used in the RMS model, as contemplated by Section 627.0628. The Alleged Deficiencies in the Homeowners Filings1/ A rate is an estimate of the expected value of future costs. It provides for all costs associated with the transfer of risk. A rate is reasonable and not excessive, inadequate or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer. In preparing a filing, an actuary identifies the time period that its proposed rates are expected to be in effect. Because ratemaking is prospective, it involves determining the financial value of future contingent events. For the rate filings in question, actuaries for Hartford developed their rate indications by first considering trended premium, which reflects changes in premium revenue based on a variety of factors, including construction costs and the value of the buildings insured. Trended premium is the best estimate of the premium revenue that will be collected if the current rates remain in effect for the time period the filing is expected to be in place. Expenses associated with writing and servicing the business, the reinsurance costs to support the business and an allowance for profit are subtracted from the trended premium. The remainder is what would be available to pay losses. This approach to ratemaking, which is used by Hartford, is a standard actuarial approach to present the information for a rate indication. As part of the process, expected claims and the cost to service and settle those claims is also projected. These calculations show the amount of money that would be available to pay claims if no changes are made in the rates and how much increased premium is necessary to cover claims. The additional amount of premium reflects not only claims payments but also taxes, licenses and fees that are tied to the amount of premium. The first deficiency identified by OIR is that "the premium trends are too low and are not reflective of the historical pattern of premium trends." In determining the premium trend in each filing, Hartford used data from the previous five years and fit an exponential trend to the historical pattern, which is a standard actuarial technique. Hartford also looked at the factors affecting the more recent years, which were higher. For example, the peak in premium trend in 2006 was a result of the cost increases driven by the 2004 and 2005 hurricanes, and the peak in demand for labor and construction supplies not matched by supply. Costs were coming down going into 2007, and Hartford believed that 2006 was out of pattern from what they could anticipate seeing in the future. The premium trends reflected in Hartford's filings are reasonable, reflective of historical patterns, and based on standard actuarial techniques. The second identified deficiency with respect to the homeowner filings was that the loss trends are too high and are not reflective of the historical pattern of loss trends. A loss trend reflects the amount an insurance company expects the cost of claims to change. It consists of a frequency trend, which is the number of claims the insurance company expects to receive, and a severity trend, which is the average cost per claim. The loss trend compares historical data used in the filing with the future time period when the new rates are expected to be in effect. Hartford's loss trends were estimated using a generalized linear model, projecting frequency and severity separately. The model was based on 20 quarters of historical information. The more credible testimony presented indicates that the loss trends were actuarially appropriate. The third identified deficiency is that the loss trends are based on an unexplained and undocumented method using "modeled" frequency and severity as opposed to actual frequency and severity. As noted above, the generalized linear model uses actual, historical data. Sufficient documentation was provided in the filing, coupled with Hartford's August 20, 2007, letter. The method used to determine loss trends is reasonable and is consistent with standard actuarial practice. The fourth identified deficiency is that loss trends are excessive and inconsistent compared to other sources of loss trends, such as Fast Track data. Saying that the loss trends are excessive is a reiteration of the claim that they are too high, already addressed with respect to deficiency number two. Fast Track data is data provided by the Insurance Services Office. It uses unaudited information and is prepared on a "quick turnaround" basis. Fast Track data is based on paid claims rather than incurred claims data, and upon a broad number of companies with different claims settlement practices. Because it relies on paid claims, there is a time lag in the information provided. Hartford did not rely on Fast Track data, but instead relied upon its own data for calculating loss trends. Given the volume of business involved, Hartford had enough data to rely on for projecting future losses. Moreover, Respondents point to no statutory or rule requirement to use Fast Track data. The filings are not deficient on this basis. The fifth identified deficiency in the Notice of Intent to Disapprove is that catastrophe hurricane losses, ALAE and ULAE amounts are excessive and not supported. ALAE stands for "allocated loss adjustment expenses," and represents the costs the company incurs to settle a claim and that can be attributed to that particular claim, such as legal bills, court costs, experts and engineering reports. By contrast, ULAE stands for "unallocated loss adjustment expense" and represents the remainder of claims settlement costs that cannot be linked to a specific claim, such as office space, salaries and general overhead. Part of the OIR's objection with respect to this deficiency relates to the use of the RMS model. As stated above at paragraphs 25-33, the use of the RMS model is reasonable. With respect to ALAE, Hartford analyzed both nationwide data (4.4%) and Florida data (4.8%) and selected an ALAE load between the two (4.6%). This choice benefits Florida policyholders. It is reasonable to select between the national and Florida historical figures, given the amount of actual hurricane data available during the period used. With respect to ULAE, the factors used were based upon directions received from Ken Ritzenthaler, an actuary with OIR, in a previous filing. The prior discussions with Mr. Ritzenthaler are referenced in the exhibits to the filing. The more credible evidence demonstrates that the ALAE and ULAE expenses with respect to catastrophic hurricane losses are sufficiently documented in Hartford's filings and are based on reasonable actuarial judgment. The sixth identified deficiency is that the catastrophe non-hurricane losses, ALAE and ULAE amounts are excessive and not supported. According to OIR, the particular time period from 1992 to 2006 used to calculate these values has not been justified, and there has been no explanation of why the extraordinarily high reported losses for 1992 and 1993 should be expected to occur in the future. OIR's complaint with respect to non-hurricane losses is based upon the number of years of data included. While the RMS model was used for hurricane losses, there is no model for non- hurricane losses, so Hartford used its historical data. This becomes important because in both 1992 and 1993, there were unusual storms that caused significant losses. Hartford's data begins with 1992 and goes through 2006, which means approximately fifteen years worth of data is used. Hartford's explanation for choosing that time period is that hurricane models were first used in 1992, and it was at that time that non-hurricane losses had to be separated from hurricane losses. Thus, it was the first year that Hartford had the data in the right form and sufficient detail to use in a rate filing. Petitioners have submitted rate filings in the past that begin non-hurricane, ALAE and ULAE losses with 1992, increasing the number of years included in the data with each filing. Prior filings using this data have been approved by OIR. It is preferable to use thirty years of experience for this calculation. However, there was no testimony that such a time-frame is actuarially or statutorily required, and OIR's suggestion that these two high-loss years should be ignored is not based upon any identified actuarial standard. Hartford attempted to mitigate the effect of the severe losses in 1992 and 1993 by capping the losses for those years, as opposed to relying on the actual losses.2/ The methodology used by Hartford was reasonable and appropriate. No other basis was identified by the OIR to support this stated deficiency. The seventh identified deficiency is that the underwriting profit and contingency factors are excessive and not supported. The underwriting profit factor is the amount of income, expressed as a percentage of premium, that an insurance company needs from premium in excess of losses, settlement costs and other expenses in order to generate a fair rate of return on its capital necessary to support its Florida exposures for the applicable line of business. Hartford's proposed underwriting profit factor for its largest homeowners filing is 15.3%. Section 627.062(2)(b), Florida Statutes, contemplates the allowance of a reasonable rate of return, commensurate with the risk to which the insurance company exposes its capital and surplus. Section 627.062(2)(b)4., Florida Statutes, authorizes the adoption of rules to specify the manner in which insurers shall calculate investment income attributable to classes of insurance written in Florida, and the manner in which investment income shall be used in the calculation of insurance rates. The subsection specifically indicates that the manner in which investment income shall be used in the calculation of insurance rates shall contemplate allowances for an underwriting profit factor. Florida Administrative Code Rule 69O-170.003 is entitled "Calculation of Investment Income," and the stated purpose of this rule is as follows: (1) The purpose of this rule is to specify the manner in which insurers shall calculate investment income attributable to insurance policies in Florida and the manner in which such investment income is used in the calculation of insurance rates by the development of an underwriting profit and contingency factor compatible with a reasonable rate of return. (Emphasis supplied). Mr. Schwartz relied on the contents of this rule in determining that the underwriting profit factor in Hartford's filings was too high, in that Florida Administrative Code Rule 69O-170.003(6)(a) and (7) specifies that: (6)(a) . . . An underwriting profit and contingency factor greater than the quantity 5% is prima facie evidence of an excessive expected rate of return and unacceptable, unless supporting evidence is presented demonstrating that an underwriting profit and contingency factor included in the filing that is greater than this quantity is necessary for the insurer to earn a reasonable rate of return. In such case, the criteria presented as determined by criteria in subsection (7) shall be used by the Office of Insurance Regulation in evaluating this supporting evidence. * * * An underwriting profit and contingency factor calculated in accordance with this rule is considered to be compatible with a reasonable expected rate of return on net worth. If a determination must be made as to whether an expected rate of return is reasonable, the following criteria shall be used in that determination. An expected rate of return for Florida business is to be considered reasonable if, when sustained by the insurer for its business during the period for which the rates under scrutiny are in effect, it neither threatens the insurer's solvency nor makes the insurer more attractive to policyholders or investors from a corporate financial perspective than the same insurer would be had this rule not been implemented, all other variables being equal; or Alternatively, the expected rate of return for Florida business is to be considered reasonable if it is commensurate with the rate of return anticipated for other industries having corresponding risk and it is sufficient to assure confidence in the financial integrity of the insurer so as to maintain its credit and, if a stock insurer, to attract capital, or if a mutual or reciprocal insurer, to accumulate surplus reasonably necessary to support growth in Florida premium volume reasonably expected during the time the rates under scrutiny are in effect. Mr. Schwartz also testified that the last published underwriting profit and contingency factor published by OIR was 3.7%, well below what is identified in Hartford's filings. Hartford counters that reliance on the rule is a misapplication of the rule (with no explanation why), is inconsistent with OIR's treatment of the profit factors in their previous filings, and ignores the language of Section 627.062(2)(b)11., Florida Statutes. No evidence was presented to show whether the expected rate of return threatens Hartford's solvency or makes them more attractive to policyholders or investors from a corporate financial perspective than they would have been if Rule 69O- 170.003 was not implemented. Likewise, it was not demonstrated that the expected rate of return for Florida business is commensurate with the rate of return for other industries having corresponding risk and is necessary to assure confidence in the financial integrity of the insurer in order to maintain its credit and to attract capital. While the position taken by OIR with respect to Hartford's filings may be inconsistent with the position taken in past filings, that cannot be determined on this record. The prior filings, and the communications Hartford had with OIR with regard to those filings, are not included in the exhibits in this case. There is no way to determine whether Petitioners chose to present evidence in the context of prior filings consistent with the criteria in Rule 69O-170.003, or whether OIR approved the underwriting profit and contingency factor despite Rule 69O- 170.003. Having an underwriting profit factor that is considered excessive will result in a higher rate indication. Therefore, it is found that the seventh identified deficiency in the Notices of Intent to Disapprove for the homeowners filings and the second identified deficiency in the Notices of Intent to Disapprove for the dwelling/fire filings is sustained. The eighth identified deficiency is that various components underlying the calculation of the underwriting profit and contingency factors, including but not limited to the return on surplus, premium to surplus ratio, investment income and tax rate are not supported or justified. Return on surplus is the total net income that would result from the underwriting income and the investment income contributions relative to the amount of capital that is exposed. Surplus is necessary in addition to income expected from premium, to insure that claims will be paid should losses in a particular year exceed premium and income earned on premium. Hartford's expected return on surplus in these filings is 15%. The return on surplus is clearly tied to the underwriting profit factor, although the percentages are not necessarily the same. It follows, however, that if the underwriting income and contingency factor is excessive, then the return on surplus may also be too high. Hartford has not demonstrated that the return on surplus can stand, independent of a finding that the underwriting profit and contingency factor is excessive. Premium-to-surplus ratio is a measure of the number of dollars of premium Hartford writes relative to the amount of surplus that is supporting that exposure. Hartford's premium-to- surplus ratio in the AARP homeowners filing is 1.08, which means that if Hartford wrote $108 of premium, it would allocate $100 of surplus to support that premium.3/ The premium-to-surplus ratio is reasonable, given the amount of risk associated with homeowners insurance in Florida. The OIR's position regarding investment income and tax rates are related. The criticism is that the filing used a low- risk investment rate based on a LIBOR (London Interbank Offering Rate), which is a standard in the investment community for risk- free or low-risk yield calculations. The filing also used a full 35% income tax rate applied to the yield. Evidence was presented to show that, if the actual portfolio numbers and corresponding lower tax rate were used in the filings, the rate after taxes would be the same. The problem, however, is that Section 627.062(2)(b)4., Florida Statutes, requires the OIR to consider investment income reasonably expected by the insurer, "consistent with the insurer's investment practices," which assumes actual practices. While the evidence at hearing regarding Hartford's investments using its actual portfolio yield may result in a similar bottom line, the assumptions used in the filing are not based on Petitioner's actual investment practices. As a result, the tax rate identified in the filing is also not the actual tax rate that has been paid by Hartford. The greater weight of the evidence indicates the data used is not consistent with the requirements of Section 627.062(2)(b)4., Florida Statutes. Therefore, the eighth deficiency is sustained to the extent that the filing does not adequately support the return on surplus, investment income and tax rate. The ninth identified deficiency is that the underwriting expenses and other expenses are excessive and not supported. Hartford used the most recent three years of actual expense data, analyzed them and made expense selections based on actuarial judgment. The use of the three-year time frame was both reasonable and consistent with common ratemaking practices. Likewise, the commission rates reflected in the agency filings are also reasonable. The tenth identified deficiency is that the non-FHCF (or private) reinsurance costs are excessive and not supported. The criticism regarding private reinsurance purchases is three- fold: 1) that Hartford paid too much for their reinsurance coverage; 2) that Hartford purchases their reinsurance coverage on a nationwide basis as opposed to purchasing coverage for Florida only; and 3) that the percentage of the reinsurance coverage allocated to Florida is too high. Hartford buys private reinsurance in order to write business in areas that are exposed to catastrophes. It buys reinsurance from approximately 40 different reinsurers in a competitive, arm's-length process and does not buy reinsurance from corporate affiliates. Hartford used the "net cost" of insurance in its filings, an approach that is appropriate and consistent with standard actuarial practices. Hartford also used the RMS model to estimate the expected reinsurance recoveries, which are subtracted from the premium costs. Hartford buys private catastrophic reinsurance on a nationwide basis to protect against losses from hurricanes, earthquakes and terrorism, and allocates a portion of those costs to Florida. Testimony was presented, and is accepted as credible, that attempting to purchase reinsurance from private vendors for Florida alone would not be cost-effective. The cost of reinsurance, excluding a layer of reinsurance that covers only the Northeast region of the country and is not reflected in calculating costs for Florida, is approximately $113 million. Hartford retains the first $250 million in catastrophe risk for any single event, which means losses from an event must exceed that amount before the company recovers from any reinsurer. In 2006, Hartford raised its retention of losses from $175 million to $250 million in an effort to reduce the cost of reinsurance. Hartford purchases reinsurance in "layers," which cover losses based on the amount of total losses Hartford incurs in various events. Hartford allocates approximately 65% of the private reinsurance costs (excluding the Northeast layer) to Florida in the AARP homeowners filing. Only 6-7% of Hartford's homeowners policies are written in Florida. The amount Hartford paid for reinsurance from private vendors is reasonable, given the market climate in which the insurance was purchased. Hartford has demonstrated that the process by which the reinsurance was purchased resulted in a price that was clearly the result of an arms-length transaction with the aim of securing the best price possible. Likewise, the determination to purchase reinsurance on a nationwide basis as opposed to a state-by-state program allows Hartford to purchase reinsurance at a better rate, and is more cost-effective. Purchasing reinsurance in this manner, and then allocating an appropriate percentage to Florida, is a reasonable approach. With respect to the allocation of a percentage of reinsurance cost to Florida, OIR argues that, given that Florida represents only 6-7% of Hartford's homeowner insurance business, allocation of 65% of the reinsurance costs to Florida is per se unreasonable. However, the more logical approach is to examine what percentage of the overall catastrophic loss is attributable to Florida, and allocate reinsurance costs accordingly. After carefully examining both the testimony of all of the witnesses and the exhibits presented in this case, the undersigned cannot conclude that the allocation of 65% of the private reinsurance costs is reasonable, and will not result in an excessive rate.4/ The eleventh identified deficiency is that the FHCF (or CAT Fund) reinsurance costs are excessive and not supported. Hartford purchases both the traditional layer of CAT Fund coverage, which is addressed in a separate filing and not reflected in these filings, and the TICL layer made available pursuant to Chapter 2007-1, Laws of Florida. Hartford removed the costs of its previously purchased private reinsurance that overlapped with the TICL layer and those costs are not reflected in these filings and have not been passed on to Florida policyholders. In estimating the amount of premium Hartford would pay for the TICL coverage, it relied on information provided by Paragon, a consulting firm that calculates the rates for the CAT Fund. As noted in finding of fact number 31, the RMS model, along with three other models accepted by the Hurricane Commission, were used by Paragon for determining expected aggregate losses to the CAT Fund reinsurance layer, clearly a crucial factor in determining the rate for the CAT fund. Hartford did not use the loss recoveries calculated by Paragon, but instead estimated the total amount of premium it would pay for the TICL coverage and subtracted the expected loss recoveries based on the RMS model alone. The expected loss recoveries under the RMS model standing alone were 60% of the loss recovery estimate calculated by Paragon when using all four models. Hartford claimed that its use of the RMS model was necessary for consistency. However, it pointed to no actuarial standard that would support its position with respect to this particular issue. Moreover, given that the premium used as calculated by Paragon used all four models, it is actually inconsistent to use one number which was determined based on all four models (the Paragon-based premium estimate) for one half of this particular calculation and then subtract another number using only one model for the other half (the loss recoveries rate) in order to determine the net premium. To do so fails to take into account the unique nature of the CAT fund, in terms of its low expenses and tax-exempt status. Accordingly, it is found that the CAT-Fund reinsurance costs for the TICL layer are excessive. The twelfth identified deficiency is that Hartford did not consider in the filing that no new business is being written. OIR's explanation of this asserted deficiency is that the costs associated with writing new business are generally higher than that associated with writing renewals. Therefore, according to OIR, failure to make adjustments to their historical experience to reflect the current mix of business, means that the costs included in the filing would be excessive. Hartford began restricting the writing of new business for these filings in 2002. Ultimately, no new business for the AARP program was written after November 2006 and no new business was written for the agency program after June 2006. Credible evidence was presented to demonstrate that a very low percentage of new business has been written over the period of time used for demonstrating Hartford's historical losses. As a result, the effect of no longer writing new business is already reflected in the data used to determine expenses. No additional adjustment in the filing was necessary in this regard. The thirteenth identified deficiency is that no explanation has been provided as to why Hartford believes it is reasonable to return such a low percentage of premium in the form of loss payments to policyholders. For example, for the building policy forms, OIR states that only about 40% of the premium requested by Hartford is expected to be returned to policyholders in the form of loss payments. OIR pointed to no actuarial standard that would require a specific explanation regarding how much of the premium should be returned to policyholders. Nor was any statutory or rule reference supplied to support the contention that such an explanation was required. Finally, the more credible evidence presented indicates that the correct percentage is 44%. In any event, this criticism is not a basis for finding a deficiency in the filing. Alleged Deficiencies in the Dwelling/Fire Filings The seventh deficiency identified in the dwelling/fire filings, not reflected in the homeowner filings, is that the credibility standard and credibility values are not supported. Credibility is the concept of identifying how much weight to put on a particular set of information relative to other potential information. Credibility value is determined by applying the "square root rule" to the credibility value, a commonly used actuarial approach to credibility. Hartford used the credibility standard of 40,000 earned house years in these filings. This credibility standard has been the standard within the industry for personal property filings for over forty years and has been used in prior filings submitted to OIR. Mr. Schwartz testified that his criticism with respect to the credibility standard and credibility values is that Hartford did not explain why they used that particular standard. However, Florida Administrative Code Rule 69O-170.0135 discusses those items that must be included in the Actuarial Memorandum for a filing. With respect to credibility standards and values, Rule 69O-170.0135(2)(e)5., provides that the basis need only be explained when the standard has changed from the previous filing. Given that no change has been made in these filings with respect to the credibility standard, this criticism is not a valid basis for issuing a Notice of Intent to Disapprove. The ninth deficiency in the Notice relating to the dwelling/fire filing in Case No. 07-5187 provides: "No explanation has been provided as too (sic) why Hartford believes it needs such a large rate increase currently, when the cumulative rate change implemented by Hartford for this program from 2001 to 2006 was an increase of only about 10%." With respect to Case No. 07-5188, the deficiency is essentially the same, except the cumulative rate change identified for the same period of time is a decrease of about -3%. Testimony established that the dwelling/fire rate increases were larger than those identified for the homeowners filings because Hartford did not seek rate increases for these lines for several years. The decision not to seek increases was not based on the adequacy of current rates. Rather, the decision was based on an internal determination that, based on the relatively small number of policies involved in these two filings, the amount of increased premium reflected in a rate increase was not sufficient to incur the costs associated with preparing the filings. Mr. Schwartz pointed to no authority, either in statute, rule, or Actuarial Standard, that requires the explanation he desired. He acknowledged that he understood the basis of how Hartford reached the rate increase they are requesting. The failure to provide the explanation Mr. Schwartz was seeking is not a valid basis for a Notice of Intent to Disapprove.
Recommendation Upon consideration of the facts found and conclusions of law reached, it is RECOMMENDED: That a final order be entered that disapproves the rate filings in Case Nos. 07-5185 and 07-5186 based upon the deficiencies numbered 7,8,10 and 11 in the Notices of Intent to Disapprove, and that disapproves the rate filings in Case Nos. 07-5187 and 07-5188 based on the deficiencies numbered 2,3,5 and in the Notices of Intent to Disapprove. DONE AND ENTERED this 28th day of March 2008, in Tallahassee, Leon County, Florida. S LISA SHEARER NELSON Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 28th day of March, 2008.
The Issue The issue presented is whether Respondent is guilty of the allegations contained in the Administrative Complaint filed against him, and, if so, what disciplinary action should be taken against him, if any.
Findings Of Fact At all times material hereto, Respondent has been licensed in Florida as a life and variable annuity contracts salesman and as a life and health insurance agent. In 1994 twin sisters Edith Ellis and Gertrude Franklin attended a luncheon at which Respondent made a presentation. The sisters were then 79 years old, and both were the owners of single-premium insurance policies issued by Merrill Lynch. They decided to cash in their existing policies and purchase new policies through Respondent. Both Ellis and Franklin executed 1035 exchange forms whereby the monies obtained from cashing in their Merrill Lynch policies were transferred to the insurance companies issuing their new policies. Both were charged a substantial penalty by Merrill Lynch. On August 11, 1994, Security Connecticut Insurance Company issued to Edith Ellis a flexible premium adjustable life insurance policy with a face value of $150,000. The cover page of the policy recites in bold print that it is a flexible premium adjustable life insurance policy, directs the insured to read the policy, and provides a 20-day period for canceling the policy with a full refund. It also contains a statement that provides: This Policy provides flexible premium, adjustable life insurance to the Maturity Date. Coverage will end prior to the Maturity Date if premiums paid and interest credited are insufficient to continue coverage to that date. Dividends are not payable. Flexible premiums are payable to the end of the period shown, if any, or until the Insured's death, whichever comes first. The cover page also recites that the first premium is $75,000 and that the monthly premium is $805.75. After deductions, Merrill Lynch only transferred $44,928.81, and Ellis never paid any additional premiums. Therefore, the policy was not funded to maturity since the company only received a partial payment. The insurance company did not set up this policy to receive periodic premium payments because it was originally anticipated that the company would receive $75,000 which would carry the expense, based upon the then interest rate. The policy was dependent upon interest rates. The company sent annual statements, however, to both Ellis and to the agency where Respondent worked. These statements clearly showed a declining accumulated value for the policy and specified how much it had declined from the previous year. When Ellis surrendered the policy on July 3, 2002, its value was $4,849. First Colony Life Insurance issued a flexible premium adjustable life insurance policy to Gertrude Franklin on October 18, 1994, with a face value of $600,000. The cover page provides for a 20-day cancellation period with a full refund of premiums paid. In bold type, the cover page further advises as follows: "Flexible Premium Adjustable Life Insurance Policy", "Adjustable Death Benefit Payable at Death", "Flexible Premiums Payable During Insured's Lifetime", and "Benefits Vary with Current Cost of Insurance Rates and Current Interest Rates." It also advises that the initial premium is $56,796. The insurance company received an initial premium payment of $203,993.75 on December 19, 1994, and an additional premium payment in February 1996, for a total of premiums paid of approximately $266,000. The total premiums received, however, were insufficient to fund the policy to maturity since that would have required in excess of $400,000 in premiums. Annual statements sent by the insurance company reflected that the policy value was declining. On August 26, 1996, the insurance company received a letter over the name of Nancy Franklin, the trustee of the trust which owned the policy, advising the company to send billing and annual statements to the address of the agency where Respondent was employed. Respondent sent that letter as a courtesy because Gertrude Franklin asked him to keep her papers for her because she had no place to keep them. Gertrude Franklin, not her daughter, signed that letter. Respondent left that agency in October 1997 and was not permitted to take any records with him. In 2002 Edith Ellis showed her policy to someone at a senior center. Based upon that person's statements she called her sister and told her that their policies were no good. They contacted Respondent who came to their homes and reviewed their policies. He advised Gertrude Franklin that her only options at that point were to pay an additional premium or to reduce the face value of the policy to $400,000 in order to keep it in effect longer. She chose the latter course. Respondent gave Franklin a letter for Nancy Franklin's signature directing the insurance company to reduce the face value of the policy. Franklin, not her daughter, signed the letter and forwarded it to the company. The company reduced the face value based upon that letter which it received on April 1, 2002. That directive allowed the policy to stay in force another two months.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that a final order be entered dismissing the Administrative Complaint filed against Respondent in this cause. DONE AND ENTERED this 28th day of December, 2004, in Tallahassee, Leon County, Florida. S LINDA M. RIGOT Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 28th day of December, 2004. COPIES FURNISHED: James A. Bossart, Esquire Department of Financial Services 612 Larson Building 200 East Gaines Street Tallahassee, Florida 32399-0333 Nancy Wright, Esquire 7274 Michigan Isle Road Lake Worth, Florida 33467 Honorable Tom Gallagher Chief Financial Officer Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300 Pete Dunbar, General Counsel Department of Financial Services The Capitol, Plaza Level 11 Tallahassee, Florida 32399-0300
Findings Of Fact Respondent administers Florida's Medical Assistant Program (Medicaid Program) which is jointly funded by the state and federal government under Title XIX of the Social Security Act. Under the Medicaid Program, eligible recipients receive services from providers who voluntarily participate in the program. Under the Medicaid Program, Respondent is required to reimburse providers only reasonable costs, not all costs incurred. Petitioner is a licensed Florida nursing home facility and at all times material hereto, was certified to and was participating in the Medicaid Program. Participation in the program is subject to all State and Federal laws, regulations, standards and guidelines relating to medicaid. The methodology for determining reimbursement to a nursing home such as Petitioner under the Medicaid Program is set forth in the Title XIX Long-Term Care Reimbursement Plan (Gainesville Plan) which is incorporated by reference in Rule 10C-7.0482, Florida Administrative Code. The validity of the amended rule is not being challenged in this proceeding, only its application to Petitioner. Prior to implementation of the Gainesville Plan on April 1, 1983, Medicaid's reimbursement to nursing homes was more restrictive. The Gainesville Plan resulted from settlement of a lab suit challenging the reasonableness of reimbursement to nursing homes. The Gainesville Plan as implemented on April 1, 1983, placed ceilings on the reimbursement for operating and patient care costs but not reimbursement for property costs. In 1982 Petitioner ended years of litigation when it won approval to build a nursing home without a certificate of need. Due to the extended litigation, Petitioner lost an earlier financing arrangement which, due to the then existing economic conditions, resulted in the Petitioner being forced to seek financing for the construction of the nursing home through the issuance and sale of Industrial Development Revenue Bonds authorized pursuant to City of Gainesville, Florida Resolution R- 82-13 of January 13, 1982. Under the terms of the bond issue, the facility cannot be leased, resold or refinanced before 1990 and, therefore, Petitioner is still paying the "high rate" of interest negotiated in 1982. In determining the financial feasibility of the nursing home, the auditors preparing the bond documents based their calculations on the more restrictive reimbursement methodology for Medicaid which was in effect before the Gainesville Plan. Petitioner was projecting a forty per cent (40 percent) Medicaid utilization and the bond documents warned investors of the possibility of changes in the Medicaid Program. The present Medicaid utilization is in excess of eighty per cent (80 percent) At the time it financed the nursing home, Petitioner was aware of the upcoming changes to be implemented by the Gainesville Plan but those changes were not reflected in the bond issue. The State of Florida was not involved in the bond issue. Petitioner built its nursing home to Florida licensure standards and was not required by Respondent to meet any more stringent requirements than for other Florida nursing homes. Upon entering the Medicaid Program, Petitioner was warned that its property costs appeared excessive. Petitioner's property costs were the highest of all nursing homes participating in Florida's Medicaid program as of January 1, 1985. Because the Gainesville Plan placed no A limitations on property costs, Petitioner was allowed to recover all of those costs in its Medicaid per diem rate. Petitioner could not recover all of its operating and patient care costs because those costs exceeded caps that were placed in the Gainesville Plan. The medicaid per patient day amount of such total property costs was initially approved by Respondent in the sum of $37.6740, based on a low occupancy during the start up phase of the facility. The implementation of the Gainesville Plan created a significant increase in the state funds budgeted for nursing homes. It was estimated that the first year increase would be approximately $50 million. The Florida Legislature, which appropriates the funds for Medicaid and makes recommendations as to how that money is to be spent, directed Respondent to implement ceilings on property costs. On September 1, 1984, the Gainesville Plan was amended to include caps for property costs. In determining reasonable caps, Respondent through the Gainesville Plan, utilized a formula similar to that which it utilizes in capping operating and patient care caps. That formula took the median of the per diem property costs for the 100 newest nursing homes participating in Medicaid and increased it by one standard deviation. New nursing homes were given a higher property cost cap during their first 18 months of operation to allow for startup costs. As a result of Respondent using this new formula for determining reimbursement rates for property cost, the Petitioner was notified in August, 1984 that effective in September 1, 1984 its property costs reimbursement rate would be reduced to $15.91 per patient day and further reduced to $12.56 effective January 1, 1985. Respondent considered the property costs reimbursement rate caps reasonable based upon a comparison of statewide per diem rates. As of January 1, 1985, only 38 or 10 percent of nursing homes participating in Medicaid had their property costs capped. The Gainesville Plan was subsequently approved by the federal government which considers the reasonableness of cost reimbursement in approving such plans. Since property costs reimbursement rates must be set at a level which will be adequate to reimburse allowable and reasonable property costs of an economically and efficiently operated facility, property costs of existing facilities that exceeded the "cap" were not "grandfathered" in under the September 1, 1984 amendment to the Gainesville Plan because they were considered not to be reasonable. Petitioner was immediately affected by the reduction in the property costs reimbursement rates which became effective on September 1, 1984. Because of its financing arrangement and because of a large Medicaid population, Petitioner experienced a large shortfall between actual costs incurred and costs that would be reimbursed by the Medicaid Program. Petitioner's property costs were the highest of all nursing homes participating in Florida's Medicaid Program as of January 1, 1985. Nationwide, Florida ranks in the top ten percent (10 percent) in average Medicaid nursing home per diem payment. There is no requirement that a nursing home accept Medicaid's patients. On October 1, 1985, Respondent went to a fair rental value system to determine allowable Medicaid property costs. Under that system, through negotiations with representatives of the nursing home industry, $28,500 was established as a reasonable cost per bed. In 1982, Petitioner's cost per bed, including financing, was approximately $41,000. Petitioner's Medicaid per diem rate has been calculated in accordance with the method set forth in the Gainesville Plan and Petitioner has not been treated differently than any other provider in the determination of its Medicaid per diem rate. Although Petitioner had been previously allowed to recover all its property cost under the Gainesville Plan prior to amendment, there was insufficient evidence in the record to prove that Petitioner's property costs not reimbursed under the plan as amended were allowable and reasonable costs of an economically and efficiently run facility.
Recommendation Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record and the candor and demeanor of the witnesses, it is, therefore, RECOMMENDED that the Respondent enter a Final Order denying Petitioner's request for an adjustment to its Medicaid per diem rate. Respectfully submitted and entered this 21st day of May, 1987, in Tallahassee, Leon County, Florida. WILLIAM R. CAVE Hearing Officer Division of Administrative Hearings The Oakland Building 2009 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 21st day of May, 1987. APPENDIX TO RECOMMENDED ORDER, CASE NO. 84-3405 The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the parties in this case. Rulings on Proposed Findings of Fact Submitted by the Petitioner Covered in the Background. Adopted in Finding of Fact 20. Adopted in Finding of Fact 4. 4.-5. Adopted in Finding of Fact 8 but clarified. 6.-8. Adopted in Finding of Fact 12 but clarified. Adopted in Finding of Fact 12 as clarified and 14. Adopted in Finding of Fact 14. Adopted in Finding of Fact 17. Rejected as immaterial and irrelevant. Rejected as not supported by substantial competent evidence in the record and as immaterial and irrelevant. Rejected as immaterial and irrelevant. Rejected as not supported by substantial competent evidence in the record. Rejected as immaterial and irrelevant. 17.-21. Rejected as not supported by substantial competent evidence in the record. Rejected as immaterial and irrelevant. Rejected as not supported by substantial competent evidence in the record. Rulings on Proposed Findings of Fact submitted by the Respondent 1.-13. Adopted in Findings of Fact 1 through 13, respectively. 14. Adopted in Finding of Fact 21. 15. Adopted in Finding of Fact 14. 16. Adopted in Finding of Fact 15. 17. Adopted in Finding of Fact 16. 18. Adopted in Finding of Fact 17. 19. Adopted in Finding of Fact 18. 20. Adopted in Finding of Fact 19. 21. Adopted in Finding of Fact 22. 22. Adopted in Finding of Fact 23. 23. Adopted in Finding of Fact 20. 24. Adopted in Finding of Fact 24. 25. Adopted in Finding of Fact 25. COPIES FURNISHED: Grafton B. Wilson, II, Esquire Gregory L. Coler, Post Office Box 1292 Secretary Gainesville, Florida 32602 Department of HRS 1323 Winewood Boulevard Tallahassee, Florida 32399-0700 Theodore E. Mack, Esquire 1323 Winewood Boulevard Building 1, Room 40 Tallahassee, Florida 32399
Findings Of Fact The Department of Insurance (Respondent) is charged with regulating the business of insurance in the State of Florida. As part of this responsibility, Respondent examines and analyzes rate increases. The scope of proposed Rule 4-166.051, Florida Administrative Code, entitled "Examination of Significant Rate Increases," provides: (2) Scope. This rule applies to residential and habitational, personal and commercial property insurance in the State of Florida . . . . The proposed rule requires Respondent to conduct public hearings on rate increases of insurers under certain specific conditions: (3) Public Hearings. Significant Rate Increases. The Department will hold a public hearing on any rate filing where the percentage of rate increase is 25 percent or more and the aggregate amount of such rate increase is $2,000,000 or more, or a rate increase of 50 percent or more. The Department will hold a public hearing as to any rate filing which appears to have a signi- ficant or disproportionate impact on any group or geographic area. Respondent contends that insurers employing the present methods for rate filings would be able to calculate the increases and would, therefore, have no difficulty in determining whether they meet the threshold in the proposed rule. The proposed rule provides in Section (3) a procedure for the public hearings: Procedure. The time and place of the public hearing will be noticed by order of the Department. The public hearing shall be for the purpose of gathering information and evidence, and is not subject to the procedures of Chapter 120, Florida Statutes. Each insurer shall bear its own costs, including any attorney's fees, which may be associated with this examination and with its attendance at the public hearing. Specifically, the public hearing will provide the Department with, and the insurer shall be prepared to present, information necessary to determine whether: The proposed activity will have a hazardous or detrimental effect upon the residential property insurance market in this State and a specific adverse, hazardous, or detrimental effect upon its policyholders located in this State. The proposed activity violates the terms and conditions of residential property insurance policies and constitutes material misrepresentation, or results in the insurer having unlawfully misrepresented the benefits and promises which induced its policyholders to purchase policies from the insurer. The proposed rating structure, elimination of current policyholders, and overall marketing strategies of the insurer, in relation to current market conditions in this State, render the insurer's rates excessive, inadequate, or unfairly discriminatory. The proposed activity constitutes an arbitrary or capricious act of unfair discrimination against policyholders, and constitutes a practice detrimental to the insurer's policyholders or the insurance buying public. The proposed activity will adversely contribute to a further reduction in the availability of residential property insurance in this State and the ability of the current admitted market to absorb further losses or liabilities. The proposed activity will adversely impact the Residential Property and Casualty Joint Underwriting Association's (RPCJUA) ability to provide coverage and/or service to present or potential insureds. Other relevant impact. Respondent is granted general authority by the Legislature, through Section 624.324, Florida Statutes, to hold public hearings within the scope of the insurance code 1/ whenever it deems such action necessary. Respondent contends that this authorization includes holding public hearings on rate increases which it has deemed necessary to be in the public eye. Section 627.062, Florida Statutes, entitled "Rate standards," provides that no rate shall be "excessive, inadequate, or unfairly discriminatory" and mandates certain specific factors and standards to be considered by Respondent when making a determination whether a rate is excessive, inadequate, or unfairly discriminatory. Respondent contends that the factors and standards in Section 627.062 are not all inclusive but are only some of the factors and standards to be considered; the others are located throughout the insurance code. Respondent contends that interpreting Section 627.062, Florida Statutes, requires a reading of the insurance code as a whole. For example, some terms in Section 627.062 are explained in other parts of the code, so the applicable parts of the code defining and explaining the terms would have to be read in para materia with Section 627.062. The proposed rule is designed, as contended by Respondent, to affect only those insurers which significantly increase their residential property insurance rates; it is not designed to affect all insurers which increase their rates. Also, as part of its design, the proposed rule reflects Respondent's experience with the impact of Hurricane Andrew on the consumer and the insurance industry and with an emergency rule which addressed the same subject of rate increases. However, the emergency rule included lower thresholds in which Respondent attempted to affect only those insurers with significant rate increases. The proposed rule serves, as contended by Respondent, four purposes: to assist Respondent in its statutory duty to report annually to the Legislature; (2) to reveal subtle, but important, factors which affect Respondent's decision in determining whether a proposed rate is excessive; (3) to assist Respondent in uncovering unfair trade practices, if any, in proposed rate increases; and (4) to ameliorate the impact of large rate increases on consumers. As to Respondent's reporting duty, part of Respondent's statutory responsibility is to report the ramifications and implications of large rate hikes to the Legislature. Because of the devastation caused by Hurricane Andrew, an unprecedented number of rate filings for large increases have occurred and a severe availability crisis exists with residential property insurance; if insurance is unaffordable, it is unavailable. Respondent contends that in order to make a determination on the rate filings, it must know the ramifications of the rate hikes on insureds and that public hearings provide an avenue to obtain such information. Regarding the subtle, but important, factors affecting Respondent's determination of whether a proposed rate is excessive, a public hearing, contends Respondent, would allow Respondent to include the effects of the proposed rate increase on the lives of consumers, removing the effect from only the mathematical or academic arena. Respondent contends that obtaining information of such an effect would include an examination of market conditions, which it is authorized to do by Section 627.062, 2/ and which examination includes reviewing marketing techniques, such as advertising, for misrepresentations by insurers. As to assisting Respondent to uncover unfair trade practices, Respondent points to "redlining" as an example which in the context of rate increases would encompass the denial of insurance by an insurer to a certain group of people in a given territory because of the increase, i.e., the increase would cause the insurance to be unaffordable and, therefore, unavailable to a certain group of people within a given territory. The insurance code provides a redlining statute 3/ which addresses redlining as the refusal to insure or to continue to insure a risk solely because of certain enumerated factors. Regarding the amelioration of the impact of large rate increases on consumers, Respondent contends that public hearings would provide a forum for the insurer and consumer or insured to freely exchange information and to educate one another on their respective positions and on the effects of a rate increase on both of them. According to Respondent, consumers have a belief that insurers increase rates unreasonably. Additionally, Respondent contends that, through the public hearing, it could direct consumers to less expensive alternatives. The term "proposed activity" is used in the proposed rule but is not defined by it. Respondent contends that no limits would be placed on the subject matter addressed in the public hearings but that any matter which may have a bearing on any of the items in the proposed rule would be addressed in the public hearings. Pursuant to Section 627.0613, Florida Statutes, the insurance code provides for an Insurance Consumer Advocate who is authorized to examine rate filings and to make a recommendation to Respondent that the Consumer Advocate deems to be in the public interest. There are approximately 1,200 rate filings a year, and the Consumer Advocate is unable to examine each filing, so he has developed a formula for selecting the rate filings for review. A public hearing on a rate filing would be useful to him in executing his statutory function regarding rate filings; however, such a public hearing is not authorized by Section 627.0613. American Insurance Association's standing is not at issue in this proceeding.
The Issue In this proceeding, pursuant to Section 120.56(4), Florida Statutes, Petitioner United Property & Casualty Insurance Company ("United") challenges several alleged "statements" of Respondent Department of Insurance (the "Department"), which United alleges are rules as defined in Section 120.52(15), Florida Statutes, that have not been adopted properly and therefore violate Section 120.54(1)(a), Florida Statutes. The statements at issue arise from the Department's interpretation and implementation of statutes that authorize insurers such as United to recoup reimbursement premiums paid to the Florida Hurricane Catastrophe Fund (the "CAT Fund"). United seeks a final order: (1) declaring that some or all of the above alleged statements, in whole or in part, violate Section 120.54(1)(a), Florida Statutes; (2) directing that the Department immediately stop relying on any illegal unadopted rule as a basis for agency action; and (3) awarding reasonable attorneys' fees and costs pursuant to Section 120.595(4)(a), Florida Statutes.
Findings Of Fact The evidence presented at final hearing established the facts that follow. The Parties United is a Florida domiciled property and casualty insurance company that received its Certificate of Authority to write homeowners and dwelling fire insurance in this state on April 2, 1999. As an insurer transacting business in this state, United operates within and subject to the regulatory jurisdiction of the Department, which is the executive branch agency responsible for administering and enforcing the Florida Insurance Code. Rates and Premiums United is required by law to establish rates for the lines of insurance it writes in this state. See Section 627.062, Florida Statutes. A "rate" is "the unit charge by which the measure of exposure or the amount of insurance specified in a policy of insurance or covered thereunder is multiplied to determine the premium." Section 627.041(1), Florida Statutes. The term "premium" means "the consideration paid or to be paid to an insurer for the issuance and delivery of any binder or policy of insurance." Section 627.041(2), Florida Statutes. Thus, simply put, the rate times the amount of coverage equals the cost of insurance, which may then be adjusted further to calculate the total premium to be charged a particular policyholder — by applicable discounts, credits, or surcharges included in the insurer's approved rating plan. See, e.g., Section 627.062(2)(d), (e)4, Florida Statutes. Rates and rating plans must be approved by the Department. See Section 627.062, Florida Statutes. The Department's duty is to disapprove rates that are "excessive, inadequate, or unfairly discriminatory." Id. An appropriate and adequate rate "is supposed to pay all the [insurer's costs]," T-222, and afford the insurer "a reasonable rate of return on [the] classes of insurance written [by that insurer] in this state." Section 627.062(2)(a), Florida Statutes. United's Initial Rate Filings and Take-Out Plan On March 3, 1999, United made two initial rate filings with the Department, one for homeowners insurance and the other for dwelling fire. As United explained in its cover letters to the Department, each line of business constituted a proposed "Take Out Program," meaning that United planned to remove homeowners and dwelling fire policies from the Florida Residential Property and Casualty Joint Underwriting Association ("FRPCJUA"). 5/ United also advised the Department that each Manual of Rates and Rules that it was filing was "basically that of the FRPCJUA with some modification to remove extraneous provisions and change names." The parties sometimes have called this type of rate filing a "me too" filing, a descriptive appellation that quickly, if colloquially, conveys the idea that the insurer is taking advantage of the FRPCJUA's already approved rates. On March 3, 1999, the Department's Bureau of Property and Casualty Forms and Rates accepted United's initial homeowners and dwelling fire insurance rates for use. Later, United's rates were approved with an effective date of April 19, 1999. On April 2, 1999, pursuant to a Consent Order with the Department which approved United's take-out plan, United removed approximately 11,500 policies from the FRPCJUA. Each of the policies that United removed from the FRPCJUA is a "covered policy" as defined in Section 215.555(2)(c), Florida Statutes. Consequently, United was required, as is every insurer that writes covered policies in this state, to enter into a "reimbursement contract" with the State Board of Administration, the agency that directs and controls the CAT Fund. Section 215.555(4), Florida Statutes. The CAT Fund and Reimbursement Premiums The legislature created the CAT Fund in November 1993 during a special session that was "called due to a potential crisis in the insurance industry in the aftermath of Hurricane Andrew." 6/ The CAT Fund's purpose was and remains to provide "a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses." Section 215.555(1)(e), Florida Statutes. In consideration for the right to reimbursement from the CAT Fund in the event of a hurricane catastrophe, insurers are required, under their reimbursement contracts, annually to pay into the fund a reimbursement premium. Id.; see also Section 215.555(5), Florida Statutes. Recoupment of Reimbursement Premiums In 1995, the legislature passed a law allowing insurers to recoup reimbursement premiums paid into the CAT Fund. See Chapter 95-276, Laws of Florida. Effective June 14, 1995, this new law, codified as Section 627.062(5), Florida Statutes (Supp. 1996), provided: With respect to a rate filing involving coverage of the type for which the insurer is required to pay a reimbursement premium to the Florida Hurricane Catastrophe Fund, the insurer may recoup the actual amount of reimbursement premium by including in the insurer's rate filing an allowance for the reimbursement premium charged by the Florida Hurricane Catastrophe Fund. In the filing, the insurer must adjust its rates to remove that portion of the rates attributable to catastrophe losses expected to be covered by the Florida Hurricane Catastrophe Fund. In determining what portion of a rate is attributable to catastrophes covered by the Florida Hurricane Catastrophe Fund, the projected recovery from the fund shall be calculated according to the formula specified in s. 215.555(4)(c). During its next regular session, in 1996, the legislature enacted Chapter 96-194, Laws of Florida, which amended Section 627.062(5), Florida Statutes, effective January 1, 1997, to read: With respect to a rate filing involving coverage of the type for which the insurer is required to pay a reimbursement premium to the Florida Hurricane Catastrophe Fund, the insurer may fully recoup in its property insurance premiums any reimbursement premiums paid to the Florida Hurricane Catastrophe Fund, together with reasonable costs of other reinsurance, but may not recoup reinsurance costs that duplicate coverage provided by the Florida Hurricane Catastrophe Fund. Section 627.062(5), Florida Statutes (1997). This version of the section remains in effect today. In 1997, the legislature created yet another new statute addressing the subject of CAT Fund reimbursement premiums. See Chapter 97-55, Laws of Florida. Taking effect on May 9, 1997, Section 672.0629(10), Florida Statutes, provides: A property insurance rate filing that includes any adjustments related to premiums paid to the Florida Hurricane Catastrophe Fund must include a complete calculation of the insurer's catastrophe load, and the information in the filing may not be limited solely to recovery of moneys paid to the fund. The Department's Interpretation and Implementation of the Recoupment Statutes Douglas Hazeltine, an actuary employed by the Department, is the principal regulator regarding recoupment of CAT Fund reimbursement premiums. In that capacity, he is, and at all material times has been, responsible for interpreting and applying Sections 627.062(5) and 627.0629(10), Florida Statutes. Although he denied having a policy-making role at the Department, Mr. Hazeltine testified that his interpretation and application of these particular statutes consistently has been approved by his superiors, with whom (as well as with other colleagues) he has discussed these matters. Accordingly, great weight has been given to Mr. Hazeltine's testimony as an accurate expression of the Department's positions on the meaning and operation of Sections 627.062(5) and 627.0629(10), Florida Statutes (hereafter, collectively, the "Recoupment Statutes"). 7/ The Department takes the view that insurers may pass along the CAT Fund reimbursement premiums to their own policyholders in one of two ways. The first method — which, according to Mr. Hazeltine, is employed by most insurance companies — is to prospectively load the base rates with a CAT Fund Factor (that is, a factor attributable to catastrophic hurricane losses expected to be covered by the CAT Fund, see endnote 3). In the Department's eyes this is simply normal rate-making procedure; the exposure covered by the CAT Fund is built into the insurer's base rates, just as other risks are, as if the insurer itself (rather than the CAT Fund) would pay the portion of any catastrophic hurricane losses expected to be covered by the CAT Fund. The Department does not consider the Recoupment Statutes to either govern or proscribe the accepted practice of prospectively loading base rates with a CAT Fund Factor. The other method is to set base rates that are net of expected recoveries from the CAT Fund (i.e. are not loaded with a CAT Fund Factor) and thereafter to impose a recoupment charge on policyholders to recover for CAT Fund reimbursement premiums paid in the previous year. A recoupment charge is retrospective, in that the insurer is collecting funds to reimburse itself for an expense that it already has paid. As Mr. Hazeltine put it, "recouping refers to something that happened in the past." Transcript of Final Hearing ("T-") 152. That is the "essence of a recoupment." T-220. The term "Recoupment Surcharge" will be used hereafter to refer to a retrospective recoupment charge. The Department considers these two methods of making policyholders pay the CAT Fund reimbursement premiums to be mutually exclusive, in the sense that an insurer must elect to use one method or the other. Thus, according to the Department, an insurer may either prospectively load its base rates to collect in advance for reimbursement premiums that will be paid in the future, or impose a Recoupment Surcharge to recover for the reimbursement premiums after paying them, but it cannot include a CAT Fund Factor in its base rates one year (e.g. 1999) and then impose a Recoupment Surcharge the next (e.g. 2000), else the policyholders would pay twice for the same CAT Fund coverage. The Department's position logically dictates that if an insurer which has been prospectively loading its base rates with a CAT Fund Factor decides to switch to the recoupment method, it must experience a transitional year during which its base rates are reduced by the CAT Fund Factor (because it will recoup the transitional year's reimbursement premiums in the next year) and in which no Recoupment Surcharge is imposed (because the prior year's reimbursement premiums were collected prospectively in the prior year's base rates). 8/ This would have a negative effect on the insurer's cash flow during the transitional year, in relation to the preceding year, which may be one reason why "most companies don't recoup" — although that was not the explanation offered by Mr. Hazeltine. T. 172 (attributing insurers' preference for prospective loading to fact that CAT Fund is "cheap reinsurance"). 9/ The Department's interpretation and application of the Recoupment Statutes is informed by a presumption that every insurer's base rates are prospectively loaded with a CAT Fund Factor unless and until: (a) the insurer makes a recoupment filing pursuant to Section 627.0629(10), Florida Statutes, which demonstrates to the Department that the CAT Fund Factor has been stripped from its base rates, and (b) the Department approves the insurer's recoupment filing, allowing the insurer to impose a Recoupment Surcharge. This presumption is based on the premise that an insurer's rates on file, having already been approved, are adequate and "fully loaded in the Department's opinion." T-223-24; see also T-153, and 170 (Hazeltine: "Whenever a company makes an initial filing, we assume that the rates that are approved -- the Department, we believe the rates that they are charging are fully loaded for all costs and they would remain that way, fully loaded for all costs, until they made a filing to change in some way."). The presumption that an insurer which is not recouping must be prospectively collecting for reimbursement premiums with CAT Fund Factor-loaded base rates is irrebuttable and hence conclusive, as Mr. Hazeltine explained: THE COURT: Can the insurance company overcome that presumption? I mean, if evidence or information is presented, can the insurance company demonstrate inadequacy of its rates by showing, for example, that it isn't -- that it is not prospectively recovering for the CAT Fund premium? THE WITNESS: Well, no, because they have to be. They have to be because there's [sic: should be "they're"] not recouping. So the definition of their rate is that it's prospectively loaded. They somehow have to show -- to recoup, they would have to show that they have an inadequate rate otherwise, and that is why the CAT factor calculation is necessary because they have to show that, without this additional money, they have an inadequate rate. THE COURT: Could they show -- I mean, could they show inadequacy of the rate by demonstrating that there is no catastrophe load in their rate and therefore they're not collecting prospectively? THE WITNESS: No, because the only way there could not be a catastrophe load in their rate is if they had started recouping, if they had already started recouping. Otherwise, it's there, it's implicitly there. T-224-25. 10/ The Department's presumption leads it to the conclusion that any insurer which elects to begin recouping must first adjust its base rates to remove the CAT Fund Factor that is conclusively presumed to be in those rates. T-172 (Hazeltine: Insurers "can come in and recoup, that's allowed, but they have to adjust their base rates."). 11/ Consequently, the Department construes Section 627.0629(10), Florida Statutes which operates on rate filings that include "any adjustments related to" reimbursement premiums 12/ — as controlling for all first-time recoupment filings. 13/ While the Department interprets Section 627.0629(10), Florida Statutes, to be applicable to all insurers making their first recoupment filings, it also considers the statute to be applicable only to first-time filers. Mr. Hazeltine drew the distinction between first-time and repeat filers: Q Now, you just made reference to a filing like United's for a first-time [recoupment] filing. Is there different information required for a company like United that's a first-time company filing for recoupment as versus some other type of company? A Right. Once the filing has been made and the catastrophe factor has been submitted and the indicated rate has been shown in the filing, any subsequent filings we would just simply need to know that a prior filing had been made so that, if they were going to change the recoupment surcharge from say eight to nine percent, if we knew that they made a prior filing, then we would know that they had adjusted their bases rates, so there wouldn't need to be the laying out of the catastrophe factor. T-149; see also T-225 (Hazeltine: "[W]e get filings in where [insurers] are already recouping, and in that situation we know, when they've filed to change their recoupment, that their base rates are net of the coverage of the CAT Fund. We know that because we handled that in a previous filing."). Thus, in the Department's view as expressed by Mr. Hazeltine, Section 627.0629(10) does not apply to an insurer that seeks to adjust a previously approved Recoupment Surcharge because the Department's approval of the insurer's initial recoupment filing signifies that the CAT Fund Factor was removed from the insurer's base rates, which accordingly need not be adjusted again. 14/ The parties agree (or at least United does not dispute) that an insurer wanting to recoup reimbursement premiums must make a filing with the Department. Both parties refer to the necessary filing as a "recoupment filing." They part company, however, on whether a recoupment filing is a "rate filing." The Department says that a recoupment filing is "a type of rate filing." T-165. United says it is not. This particular dispute is not so much about labels as it is about whether the procedural and substantive requirements that rate filings entail should attach to recoupment filings as well. The Department's position that a recoupment filing is a rate filing matters because it leads to the conclusion that the Department is empowered, pursuant to Section 627.062(2)(b), Florida Statutes, to review a recoupment/rate filing to determine if the overall rate (including the Recoupment Surcharge) is excessive, inadequate, or unfairly discriminatory. This in turn means that the Department can disapprove a recoupment filing for failure to provide sufficient "justification" in support of a proposed Recoupment Surcharge, viewed in the context of the insurer's total rate. See T-169. In addition, if recoupment filings are rate filings as the Department maintains, then the procedural and informational requirements of Rule 4-170.014, Florida Administrative Code (governing all homeowners insurance rate filings), and Rule 4-170.0141, Florida Administrative Code (governing dwelling fire insurance rate filings), might apply to them as well. Indeed, on the premise that recoupment filings are rate filings, the Department believes that all of its requirements for recoupment filings are covered by existing statutes and rules. T-253. However, neither of the Recoupment Statutes, nor any other exiting statute or rule, clearly and unambiguously sets forth a requirement that, in order to exercise its right to fully recoup, an insurer must submit a filing — whether it be called a “rate filing,” “recoupment filing,” or something else — that fully complies with the statutes and rules governing rate filings generally. At bottom, the Department's position that recoupment filings are rate filings is an interpretation of the Recoupment Statutes that can be used, and is being used, as a bootstrap to impose filing requirements that are not specifically stated in either Section 627.062(5) or Section 627.0629(10), Florida Statutes. Moreover, the Department does not require recoupment filings to comply with all of the procedures controlling rate filings generally. As Mr. Hazeltine explained: "A retroactive recoupment is a fairly -- is a less involved filing in a sense because the base rate filing may go through a lot of justification for territorial rates or there may be a lot more detail in a base rate filing." T-172 (Emphasis added). Mr. Hazeltine further described the fundamental data indispensable to a first-time recoupment filing as follows: I think what's really needed is what Mr. Stuart said. In making a recoupment filing, you need simply to show the amount of a factor, which you get by dividing the premium into the -- into the amount to be recouped. That gave him the percentage to load the rate, and you need to show your catastrophe load or the calculation of your rate so that the policyholder doesn't wind up paying twice, because if you included it in your base rates and also as a recoupment, then the policyholder would be paying for the coverage of the Catastrophe Fund twice, both in the base rate and also in the factor. * * * . . . Like I said, all you really need to know and all you -- is the projected premium. You need to know how to compute -- how the company's going to compute its factors, and you need some justification or analysis showing the catastrophe load and the total indicated rate. T-136, 142. The truly essential requirements for an insurer's subsequent recoupment filings are fewer still, as previously discussed, because "there wouldn't need to be the laying out of the catastrophe factor." T-149. There are "many types" of rate filings, said Mr. Hazeltine, and the information required to be supplied depends on the type of filing involved. T-165. The Department's statement that recoupment filings are rate filings does not, in itself, inform would-be filers which of the requirements for rate filings generally must be followed — nor do the statutes or any promulgated rules. The Proposed Rule In 1996, the Department developed a proposed rule concerning the recoupment of reimbursement premiums. Initially published on July 26, 1996, in Volume 22, Number 30 of the Florida Administrative Weekly, page 4243, Proposed Rule 4-170.016 (the “Proposed Rule”) was designed to “provide a streamlined rate revision process for the approval of requests for rates which recoup payments to the Florida Hurricane Catastrophe Fund (FHCF) . . . .” Petitioner’s Exhibit 6. The summary description of the Proposed Rule explained that it provided “specified procedures for submitting rate filings to recoup payments made to the FHCF . . . , adopt[ed] forms by reference and provide[d] limitations on amounts recoverable in a given year.” Id. It is interesting to note that the Proposed Rule appeared in the Florida Law Weekly about two months after the legislature had amended Section 627.062(5), Florida Statutes, but some six months before that amendment would take effect. Thus, at the time the Proposed Rule was published, the law allowed an insurer to recoup the “actual amount of reimbursement premium” by making a rate filing which “adjust[ed] its rates to remove that portion of the rates attributable to catastrophe losses expected to be covered by the” CAT Fund. See Section 627.062(5), Florida Statutes (Supp. 1996). Come January 1, 1997, however, Section 627.062(5) would no longer contain the language just quoted; rather, insurers would be entitled to “fully recoup” any CAT Fund reimbursement premiums they had paid without being subject to an express requirement that base rates be adjusted concomitantly. See Section 627.062(5), Florida Statutes (1997). Perhaps to close this potential loophole, the Proposed Rule incorporated the “lame duck” statutory requirement that base rates be reduced in conjunction with a recoupment filing: “If an insurer chooses to apply a recoupment charge, the insurer’s next rate filing must exclude the portion of the rates attributable to catastrophic losses expected to be covered by the FHCF or must cease collecting and charge [sic ?] rates to cover expected losses.” Petitioner’s Exhibit 7 (Proposed Rule as amended by notice published November 15, 1996, in Volume 22, Number 46, Florida Administrative Weekly, page 6658). The Proposed Rule also contained a subsection on filing requirements which read: Filing Requirements. An insurer seeking approval of an FHCF reimbursement premium recoupment charge must submit three (3) copies of the following: Recoupment of FHCS Reimbursement Premium Worksheet, Form D14-1197(10/96) which is hereby incorporated by reference plus any supporting documentation for varying the charge by territory or class; final manual page(s) which include the recoupment factor and an explanation of how it will be applied; documentation of the FHCF reimbursement premium paid by the insurer; proposed declarations page; and copies of Forms D14-1102, D14-1103, and D14-1104 as incorporated in 4-170.014, or dwelling Forms D14-1193, D14-01194 and D14-1195, as incorporated in 4-170.0141. Petitioner’s Exhibit 7. The Proposed Rule was challenged in a Section 120.56(2), Florida Statutes, proceeding. The Department withdrew the Proposed Rule on February 21, 1997, apparently before the entry of a final order in the challenge (and after the present version of Section 627.062(5) took effect on January 1, 1997). Since then, the Department has not formally adopted, nor has it attempted to adopt through rulemaking, any rules that implement the Recoupment Statutes or otherwise specifically govern recoupment filings. The Memorandum and Worksheet The Proposed Rule may have been gone, but its provisions were not forgotten. On July 29, 1997, J. Steven Roddenberry, then the Bureau Chief of the Bureau of Property and Casualty Forms and Rates, issued a Memorandum and attached worksheet to “all insurance companies authorized to write property and casualty insurance in the State of Florida.” Petitioner’s Exhibit 8. The subjects of this Memorandum were “procedures for the filing of 1996 Florida Hurricane Catastrophe Fund recoupment; [and] filing deadline for 1995 Florida Hurricane Catastrophe Fund recoupment.” Id. Mr. Roddenberry testified that the purpose of this Memorandum was to provide guidance to insurers on how to make recoupment filings for CAT Fund premiums paid in 1996 and to notify them that recoupment filings for 1995 reimbursement premiums needed to be made by September 1, 1997. The July 29, 1997, Memorandum was sent to the approximately 400 insurers writing property and casualty insurance in this state at the time. United did not exist in 1997 and therefore was not an original recipient of the Memorandum. The timing of the Memorandum in relation to statutory developments is interesting. As of July 29, 1997, Section 627.0629(10), Florida Statutes, was a brand new law, having taken effect only a couple months earlier on May 9, 1997. Section 627.0629(10), with its reference to CAT Fund premium- related “adjustments” in a “rate filing,” faintly echoes language that was deleted from former Section 627.062(5), Florida Statutes, (“In the [rate] filing the insurer must adjust its rates to remove that portion . . . attributable to” CAT Fund coverage) (emphasis added). But Section 627.0629(10) does not expressly state, as did both former Section 627.062(5) and the Department’s withdrawn Proposed Rule, that an insurer electing to recoup must adjust its rates to remove the portion attributable to catastrophic losses expected to be covered by the CAT Fund. The Memorandum memorialized the Department’s interpretation of the Recoupment Statutes as requiring recouping insurers to reduce their base rates to make them net of expected CAT Fund recoveries. It stated: As in the past, an insurer may choose to either prospectively make rates sufficient to cover the costs of the FHCF assessment, while accounting for coverage provided by it, or impose a recoupment charge to recover the assessment payments made to the FHCF. If an insurer chooses to impose a recoupment charge, the insurer must exclude from its base rate calculation the expected recoveries covered by the FHCF. An insurer may not recoup 1996 premiums paid unless it has made, or concurrently makes, a base rate filing, the calculation of which excludes recoveries from the FHCF. Petitioner’s Exhibit 8 (emphasis added). The statutory interpretation reflected in the underlined sentence from the July 29, 1997, Memorandum remains current and continues to be followed by the Department. The Memorandum also enumerated certain filing requirements which bore a striking resemblance to the ones that the withdrawn Proposed Rule would have prescribed. It stated: An insurer intending to recoup the 1996 FHCF premiums paid in 1996 must file three copies of the following for each year being recouped: Recoupment of FHCF Reimbursement Premium Charge Worksheet (please see attached); Final manual page(s) which include the recoupment factor and an explanation of how it will be applied; Documentation of the FHCF reimbursement premium paid by the insurer for 1996; Proposed declaration page; A rate filing (if appropriate) containing actuarial support that shows the calculation of the catastrophe load; and Copies of homeowner forms: D14-1102, D14-1103, and D14-1104, as incorporated in 4-170.014, Florida Administrative Code, or dwelling forms D14-1193, D14-01194 and D14- 1195, as incorporated in 4-170.0141, Florida Administrative Code. The Recoupment of FHCF Reimbursement Premium Charge Worksheet (“Worksheet”), which was the subject of the Memorandum’s filing requirement lettered a, is substantially similar to the proposed Form D14-1197 that was the subject of the withdrawn Proposed Rule’s filing requirement lettered a. The filing requirements lettered b, c, and d, respectively, in the Memorandum and in the withdrawn Proposed Rule are substantially identical to one another. The filing requirement lettered f in the Memorandum is substantially identical to the one lettered e in the Proposed Rule. 15/ In short, the Memorandum listed the same five filing requirements that the Proposed Rule had spelled out and added a sixth, lettered e, which incorporated a new obligation imposed by the recently enacted Section 627.0629(10), Florida Statutes. Although written three and a half years ago for particular purposes that have passed into history, the July 29, 1997, Memorandum nevertheless sets forth the procedural and informational requirements for recoupment filings that the Department continues to enforce to this day, as Mr. Roddenberry testified: THE COURT: . . . Mr. Roddenberry, about the memorandum, July 29, 1997, memorandum, does that memorandum set forth what currently are the pieces of information required by the Department when a company submits a retro –- or a recoupment filing? THE WITNESS: If I may, when you say currently, do you mean like today? THE COURT: Like today. THE WITNESS: Yes, sir, I believe, if this information was submitted, it would be considered a complete file. I’m afraid that, if some of this was missing, that it would not be considered a complete file. * * * THE COURT: And they would need to make a complete filing in order to be subject to approval –- if the filing were incomplete, the request would be denied? THE WITNESS: Yes, sir, because if it’s incomplete, it probably doesn’t even get past the person that not literally opens the mail –- there’s two or three steps in there –- but the person that makes the assignments to the actuaries, they go through it, and if the filing is incomplete, if it doesn’t have what the statute and the rules require, then they send it back to the company. We do that now. The Inspector General told us we had to do that. T-250-52. The Worksheet form that must be submitted to comply with the Memorandum’s first-listed filing requirement (lettered a) contains 15 numbered lines of requested information, as follows: Year FHCF Assessment Paid Line(s) of Business: Prior Year’s FHCF Premium Paid $ Prior Year’s Carry-Forward? No / Yes –- If Yes, State Amount $ 5 (3) Plus (4) $ 6 Prior Year’s Florida Direct Written Premium Excluding Ex-Wind Policies $ 7 Ratio (3) / (6) x 100 8 Forecast (One Year’s) Direct Written Premium Excluding Ex-Wind Policies $ 9 Ratio (5) / (8) x 100 % Ratio (7) Plus 5% % Formula Recoupment Surcharge Lesser of (9) or (10) % Selected Surcharge Factor Effective Date AVERAGE IMPACT ON POLICYHOLDERS / / Average Premium at Current Rate Levels $ (11) Multiplied by (14) $ Petitioner’s Exhibit 8 (footnotes omitted). Mr. Roddenberry testified that the Worksheet per se is no longer required, but “the information that is requested on that form would have to be provided either in that format or some other format . . . .” T-253. Mr. Hazeltine asserted that certain items on the Worksheet are no longer required. According to Mr. Hazeltine, the items numbered 7, 10, and 11 all pertained to a limitation on amounts recoverable in a given year that was part of the Proposed Rule and which has since been abandoned; therefore, the information requested in these items is no longer required. Similarly, the information relating to the average impact on policyholders sought in the items numbered 14 and 15 is no longer required, according to Mr. Hazeltine. Line items 4 and 5 are not applicable to first-time filers such as United but might be required of repeat recoupment filers. As for item number 6, Mr. Hazeltine equivocated somewhat: on the one hand he said it was not a required item; on the other he stated that it was necessary to know last year’s premium, but “you could just figure it out if you wanted to.” T-144. And finally, Mr. Hazeltine testified that item number 9 was not necessary — although the information sought in number 9 is simply another way of expressing the Recoupment Surcharge required in number 12. 16/ While Mr. Roddenberry’s testimony contradicted Mr. Hazeltine’s in that he stated all of the information sought in the Worksheet is still required to be submitted, whereas Mr. Hazeltine dismissed many items as unnecessary, the conflict between the two is not as great as it seems at first blush. The items relating to the since-discarded limitation (numbers 7, 10, and 11) and policyholder impact (14 and 15) are essentially irrelevant to the determination of an insurer’s Recoupment Surcharge. The information sought in the remaining line items (with the possible exceptions of numbers 6 and 9, which are either irrelevant or cumulative questions) is fundamental and must be provided. What is clear is this: The Department continues to require that insurers submit all of the relevant information requested in the Worksheet, either on that form itself or in some other format. United's Recoupment Filings Under substantially identical cover letters to the Commissioner of Insurance dated June 5, 2000, United attempted, with regard to its homeowners and dwelling fire programs, respectively, to file for "recoupment of the Florida Hurricane Catastrophe Fund premiums for the period of June 1, 1999 through May 30, 2000 applicable to [United's] 'Take-out' of 'FRPCJUA assumption' business." United informed the Department that it would apply surcharges of 1.168 and 1.2803, respectively, to all homeowners and dwelling fire policies renewed on or after September 1, 2000. In addition to a cover letter, each of United's June 5, 2000, submissions consisted of a completed form entitled "Recoupment of The Florida Hurricane Catastrophe Fund Reimbursement Premium Charge Worksheet,” which was substantially similar to (and contained the same 15 line items as) the Department's Worksheet, together with an "Explanatory Memorandum" that provided additional information on items 1-4, 6, and 8. 17/ On June 13, 2000, The Department returned United's recoupment filings without action for failure to include pages 1 and 2 of Form D14-582 (a transmittal sheet and checklist, respectively), and a return envelope, as required by Rule 4-170.013, Florida Administrative Code, which provides procedures applicable to all rate, rule, underwriting guidelines, and form filings for property and casualty insurance. United re-submitted its recoupment filings, together with the requested information, on June 20, 2000. Mr. Hazeltine acknowledged the Department's receipt of these "recent rate filing[s]" by letter dated June 27. 2000. On August 4, 2000, Mr. Hazeltine notified United that the following additional information was required to complete United's recoupment filings: (1) documentation supporting the amounts intended to be recouped; (2) an explanation as to how those amounts were allocated to line of insurance and program; (3) documentation supporting an explanation as to how United intended to adjust the catastrophe provision in its base rates; and (4) the HRCS diskette for homeowners and the DRCS diskette for dwelling. United responded with a letter from its president, Mr. Stuart, dated August 21, 2000. Included with Mr. Stuart's letter were documents substantiating the fact that United had paid about $1.68 million in reimbursement premiums for 1999 and showing an allocation of this premium expense between homeowners and dwelling. Apparently attempting to satisfy the Department's request for an explanation as to how United intended to adjust the catastrophe provision in its base rates, Mr. Stuart wrote: My understanding is that [United's consultant] Mr. Trafton was advised by Steve Roddenberry, via telephone, that United would have to base the ["me-too" takeout] filing upon the 7/97 FRPCJUA filing rather than use the 1998 filing which included the JUA recoupment within the base rates. Therefore, our ["me-too" takeout] filing has the identical base rates, as does the 7/97 FRPCJUA filing. This appeared logical since United would not incur a FHCF premium charge until late in 1999 for the June 1, 1999 FHCF period. Joint Exhibit 1. Translation: United did not intend to adjust its base rates because it believed those rates were not loaded to account for the CAT Fund reimbursement premiums. Finally, Mr. Stuart informed Mr. Hazeltine that United was "preparing the diskettes as referenced in your letter of August 4th and should provide these within the next two weeks." Id. After receiving Mr. Stuart's letter, Mr. Hazeltine attempted to contact Mr. Stuart, who was on vacation and therefore unavailable, and then reached a consultant for United named Terry Godbold, whom he advised that the Department would disapprove United's recoupment filings unless the requested diskettes were received, as well as information on the adjustment of United's catastrophe load. United, however, submitted no further information. As a result, by letter dated September 7, 2000, the Department notified United of its intent to disapprove United's recoupment filings on the ground that United had failed to justify its proposed rates or rate changes. The Department found United's filings to be deficient in the following areas: The rates originally filed were not excessive, inadequate, or unfairly discriminatory. No information, or supporting data, has been supplied in support of this filing to justify changing those rates. Section 627.062(5), Florida Statutes, provides that insurers may recoup reimbursement premiums paid to the Florida Hurricane Catastrophe Fund. However, Section 627.0629(10), Florida Statutes, requires a complete calculation of the insurer's catastrophe load and that the information in the filing not be limited solely to recovery of reimbursement premiums paid to the fund. This filing contains information relating solely to the recovery of moneys paid to the fund. The lack of information provided has been discussed thoroughly with the company during the course of this filing. The HPCS [sic] and DRCS diskettes have not been provided as requested. Joint Exhibit 1. At hearing, Mr. Hazeltine testified that United's failure to provide the diskettes, by itself, (probably) would not have resulted in the disapproval of United's filings. T-189. Are United's Base Rates Net of Expected CAT Fund Recoveries? The question whether United’s base rates are net of recoveries expected from the CAT Fund in the event of a hurricane catastrophe, as the Department has presumed, lies at the heart of United’s claim to be entitled to recoup reimbursement premiums previously paid. It is, therefore, a key question that must be answered in Case No. 00-4212, the Section 120.57 proceeding brought by United to obtain a determination of its substantial interests in recouping premiums paid to the CAT Fund. However, because the merits of United’s claim for recoupment are not directly at issue in this proceeding to challenge alleged unadopted rules, 18/ the dispute regarding the composition of United’s base rates need not be resolved here, except insofar as may be necessary to decide the Department’s attack on United’s standing. The Department contends that United lacks standing to maintain this action because it has not been injured by operation of the alleged unadopted rules, even assuming for argument’s sake that the alleged agency statements are rules by definition, which the Department denies. This argument will be addressed in the legal conclusions below. For the moment, it is sufficient to note that the Department’s position fails to persuade if, as United contends, United’s base rates in fact are not prospectively loaded with a CAT Fund Factor. If United is correct about the composition of its base rates, then it has suffered a substantial injury-in-fact as a result of the Department’s irrebuttable presumption that, unless an insurer is already recouping, its base rates are prospectively loaded. The Department’s standing argument thus implicates, at least to a limited extent, the merits of United’s claim to be entitled to recoup fully the reimbursement premiums it has paid. In view of the need to address this issue without foreclosing or encroaching upon the parties’ respective rights to a full hearing on the merits of United's alleged injury in the appropriate forum, the findings of fact herein on this particular subject are expressly limited so as not to reach beyond the standing issue at hand. Except as specifically decided here, the question whether United’s base rates are prospectively loaded with a CAT Fund Factor is left for, and will need to be litigated fully in, Case No. 4212, which is the proper vehicle for its ultimate resolution on the merits. That said, there is and can be no dispute that United's base rates, as established in its initial rate filings, include a Recoupment Surcharge — of zero. The Premium Calculation Worksheet that United submitted for its homeowners rate filing, in the section dealing with "mandatory additional charges," expressly provides that the CAT Fund Recoupment Surcharge shall be "0." Petitioner’s Exhibit 1. So, too, does the Premium Calculation Worksheet for United's dwelling fire rate filing. Respondent's Exhibit 1. 19/ In his March 3, 1999, cover letter to the Commissioner of Insurance regarding United's homeowners rate filing, United's consultant Mr. Trafton pointed this fact out, explaining: "This [premium calculation] worksheet has been revised to remove, for now, any Assessments for FHCF . . . ." Respondent's Exhibit 1. Mr. Trafton made a similar comment in his cover letter of the same date regarding United's dwelling fire rate filing. Respondent’s Exhibit 1. That United's initial rate filings set a Recoupment Surcharge of zero is consistent with its position that its base rates are not prospectively loaded with a CAT Fund Factor. At the time United made these rate filings, after all, it had paid zero in reimbursement premiums and had nothing to recoup; thus, zero was the most accurate (indeed the only true) number to submit in connection with a Recoupment Surcharge calculation. For that reason, United's representation, in its initial base rate filings, that the amounts to be recouped initially equaled zero cannot be considered the equivalent of a declination of the right to use the recoupment method of recovering CAT Fund premiums. At a minimum, United's filing can reasonably be interpreted as having left the door open to adjusting the stated surcharge of zero to a positive number after reimbursement premiums had been paid, when there would be something to recoup. While not establishing the fact directly, this does raise an inference that United's rates are net of expected CAT Fund recoveries. 20/ This inference was supported by other evidence. Mr. Stuart testified that United had removed the "recoupment charge" from its initial rate filings at the direction of the Department, on the ground that United had not yet paid any reimbursement premiums to the CAT Fund. He also stated that at the time of United's initial rate filings, the company believed that reimbursement for CAT Fund premiums would be achieved on a retrospective basis, using a surcharge to base rates. It was Mr. Stuart's understanding that United's base rates did not include a "CAT Fund recoupment." T-67. Mr. Trafton testified that Mr. Roddenberry had told him in late 1998 that United could not use the "catastrophe protection surcharge that was in the 1998 FRPC JUA rates." T-86. To Mr. Trafton, this meant that United was required to use the FRPCJUA's 1997 base rates because "it goes without saying, if . . . you can't use the catastrophe protection surcharge, you're not using the '98 rates, you're using the '97 rates." T-86. Mr. Trafton testified that as far as he could recall, United's base rates did not "include any credit or factors for expected premiums to be paid to the Catastrophe Fund." T-94. The testimony of Mr. Stuart and Mr. Trafton on the issue of whether United's base rates are prospectively loaded was not rebutted by the Department at hearing (perhaps because the Department conclusively presumes that United's rates are prospectively loaded). But at the same time, their testimony did not directly answer the question whether the 1997 FRPCJUA rates that United adopted were prospectively loaded — a proposition that does not follow necessarily from the premise (which is undisputed) that United's Recoupment Surcharge, as filed, was zero. 21/ Mr. Trafton in particular left the impression that the FRPCJUA's 1997 rates were net of expected CAT Fund recoveries, but he did not say so unambiguously. The conclusion can be deduced from his testimony, but not without difficulty. When Mr. Trafton said that United could not use the "catastrophe protection surcharge" that was "in" the 1998 rates, he might have been referring to a charge that was "built into" (i.e. prospectively loaded in) those rates. 22/ If so, then Mr. Trafton appears to have said (by making it clear that he and the Department perceived a material difference between the two years) that the 1997 rates were not prospectively loaded. (This raises the interesting possibility, not addressed in this record, that the FRPCJUA needed to impose a Recoupment Surcharge in 1998 to recover the past year's reimbursement premiums at the same time it was prospectively loading its base rates to recover in advance for the reimbursement premiums yet to be paid. See endnote 9.) If, on the other hand, Mr. Trafton meant that the FRPCJUA's 1998 rates included a "catastrophe protection surcharge" in addition to the base rates (as a retrospective means of collecting for reimbursement premiums paid), then the implication would be that the 1997 rates were net of expected CAT Fund recoveries, because otherwise the FRPCJUA's recoupment in 1998 would amount to a double recovery. But if this were the case, it is not clear why United could not have used the FRPCJUA's 1998 base rates, which presumably would have been net of expected CAT Fund recoveries, too — unless in 1998 the FRPCJUA were recouping for 1997 reimbursement premiums and also collecting prospectively for 1999 reimbursement premiums, in transition from the recoupment method to the prospective method of recovery. If the assumption is made for argument's sake that the FRPCJUA's 1997 rates were prospectively loaded (from which would follow the conclusion that United's “me-too” rates are prospectively loaded), then it becomes difficult to make sense of Mr. Trafton's and Mr. Stuart's testimony. In that event, the FRPCJUA's 1998 rates could not have included a Recoupment Surcharge (or at least not a full one, see endnote 8). The 1998 rates would have been either net of expected CAT Fund recoveries (in transition from the prospective method to the recoupment method) or prospectively loaded as in 1997. Consequently, the 1997 base rates would have been, respectively, either higher or approximately the same as the 1998 base rates. Not only would either possibility seem to leave no plausible reason for the Department to have directed United to use the 1997 base rates, but also these scenarios contradict the testimony of both Mr. Stuart and Mr. Trafton, each of whom suggested that the 1997 base rates were less generous than the rates in effect in 1998. In sum, the present record establishes that, more likely than not, the FRPCJUA's 1997 base rates were, and therefore United's base rates are, net of expected CAT Fund recoveries. In other words, United's rates are probably not prospectively loaded with a CAT Fund Factor, contrary to the Department's presumption. As explained above, however, the resolution of this case does not demand that a definitive finding of fact be made on this issue. It is enough, for now, to find that United has proved by a preponderance of evidence a reasonable likelihood that, given the opportunity (which it will have in Case No. 00-4212), it can successfully demonstrate that its rates are not prospectively loaded. No more than that is being found at this time. Whether United will succeed on the merits of its claim to be entitled to recoup reimbursement premiums paid to the CAT Fund remains to be seen; nothing decided here is intended to pre-determine the outcome of Case No. 00-4212.
Findings Of Fact In late 1988, the Respondent, Department of General Services (DGS), invited bids on a building construction project entitled "Orange County Regional Service Center Phase II, DGS-86126000" (the Project). The invitation to bid included a project manual, Volumes I and II, which contained instructions to bidders and proposed contract terms and conditions. The project manual is referred to colloquially as "the specifications." The specifications incorporated by reference A1A Document A201, General Conditions of the Contract for Construction, 1976 Edition. On October 20, 1988, the State of Florida Department of Insurance issued a notice of public hearing to the National Council on Compensation Insurance at its New York and Florida addresses and all whom it may concern. It gave notice of a public hearing to be held on November 4, 1988, for the purpose of considering a proposal filed by the council on October 17 and placed on file for public inspection on October 20, proposing an overall average increase of 47.7 percent in annual workers' compensation insurance premium rates to take effect January 1, 1989.. On October 28, 1988, there was published in the Florida Administrative Weekly a notice of hearing by the Department of Insurance, which notice advised that the council's proposal called for revised rates effective January 1, 1989, to new and renewal policies. The public hearing was held on November 4, 1988, and on November 9, 1988, the insurance commissioner rendered an "Order On Rate Filing" which called for the council to file amendments to its original filing no later than 30 days after November 9, 1988. It provided that no rate change would be implemented until the amendments were properly filed and final approval was issued by the Department of Insurance. Petitioner, Brasfield and Gorrie General Contractor, Inc., a general contracting firm, submitted a bid on the Project. Petitioner signed its bid on November 22, 1988, submitted it the same day, and bids were opened that day. The amount of the contractor's base bid was $23,487,000. Petitioner was notified that it was the low bidder on November 22, 1988. The bid submitted by Petitioner included a bid bond, named in favor of DGS, which would have been forfeited if Petitioner were the low bidder and failed to execute the contract with DGS. On December 1, 1988, the Council, in response to the November 1, 1988, order, modified its filing of October 17, 1988, and in the modified filing established a premium level increase of 28.8 percent together with certain additional rate modifications to be effective January 1, 1989. On December 7, 1988, the Department of Insurance once rendered an order approving the "filing" made by the Council. Petitioner was the successful bidder, and the parties executed the building contract on December 21, 1988. On January 18, 1989, DGS issued to the Petitioner a notice to mobilize on site and to proceed with construction which established the date for commencement of construction as January 23, 1989, and the date for completion as of July 25, 1990. The premium rate increase did not affect the contractor until July 1, 1989, its insurance policy anniversary. The approximate dollar amount of increase in premiums throughout this project was $83,434. The exact amount of the premium increase is to be determined by an audit by the contractor's insurance company after the project is completed. Petitioner included in the amount of its bid an estimated amount that it expected to pay for Workers' Compensation insurance premiums through the completion of the project. Petitioner knew that the premium rates are established by the National Council on Compensation Insurance. Petitioner's standard procedure in calculating a bid included obtaining the current rates established by the Council. Petitioner failed to inquire regarding the anticipated increases that would be in effect during most of the time while construction would be in progress. The bid amount included an anticipated increase in the amount of premiums over the then current rates. In the realm of preparation of an estimate for a 20 million job, the anticipated increase was not a significant figure. While preparing its bid, the Petitioner knew that payment of Workers' Compensation insurance premiums on a building construction project is the responsibility of the general contractor. John Mills, the contractor's vice-president and division manager, had overall responsibility for estimating the job. During bid preparation, he knew that a rate increase was pending. Mr. Mills knew during bid preparation that he could obtain from his insurance agent information on proposed rate increases. Most of the premiums to be paid on this project are attributable to concrete labor. Petitioner learned of the December 7, 1988, rate increase approval after it signed the contract on December 21, 1988. The contractor knew that in a competitively bid public contract it is obligated to perform the contract at the bid price in spite of increases in its costs of work. In calculating the estimated increase in premiums (the amount of its claim), the contractor simply subtracted the estimated amount of premiums that would be charged at the 1988 rate from the estimated amount that would be charged at the new rate. The resulting figure does not give DGS credit for the amount that the contractor included in its bid based on its estimate of three percent rate increase. The amount so included in the bid was approximately three percent of the labor cost for the entire project (estimated at $1,389,518) rather than three percent of the labor cost (estimated at $891,387) to be incurred after July 1 when the rate increase applied to the contractor. Section G-1 of the Supplementary General Conditions to the contract provides that: During the course of the Contractor's performance of the work necessary to complete the subject Project, certain events may occur which have the effect of changing the conditions under which the work is to be performed as specified and described in the Bidding Documents and/or the nature and extent of the work as specified and described in the Bidding Documents. The occurrence of such events may cause the Contractor to incur greater or lesser cost and expense to perform the work required to complete the subject Project than planned to be incurred in the Contractor's successful bid, in which event the Contractor or the Owner shall respectively be entitled to either an increase or decrease in the Contract Sum, whichever is the case, to the extent such greater or lesser cost and expense results . . DGS drafted the contract and the supplementary general conditions to the contract. Brasfield & Gorrie did not participate in the drafting of the contract or the supplementary general conditions. Brasfield & Gorrie made a claim for an increase in the contract price pursuant to Article 8.4.3 of the contract as a result of the Workers' Compensation premium base rate increase. DGS denied this claim. Brasfield & Gorrie requested an administrative hearing pursuant to the terms of the contract. Petitioner has not asked for an increase in the contract price for anything but Workers' Compensation insurance premiums. Since 1970, the Division of Building Construction has been involved in a large number of building projects that were competitively bid and took two or three years to build. The instant petition is the only claim that has been filed by a contractor on such projects for an increase in contract price based on an increase in Workers' Compensation rates. During that time, the Division never approved a contract-price increase based on an increase in the price of building materials. The "work" and the cost of the work are two distinct, separate things. There may be a change in the cost of the work without a change in the work. A change in premiums is not a change in the work.
Recommendation Based on the foregoing findings of fact and conclusions of law, it is RECOMMENDED that Petition for claim filed by Petitioner be DENIED. DONE AND ENTERED this 18th day of January, 1990, in Tallahassee, Leon County, Florida. DANIEL M. KILBRIDE Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 18th day of January, 1990. COPIES FURNISHED: Susan B. Kirkland, Esquire General Counsel Sylvan Strickland, Esquire Staff Attorney Department of General Services Koger Executive Center 2737 Centerview Drive Knight Building, Suite 110 Tallahassee, FL 32399-0950 Leslie King O'Neal, Esquire Markel, McDonough and O'Neal Post Office Drawer 1991 Orlando, FL 32802 Ronald W. Thomas Executive Director Department of General Services Knight Building, Koger Executive Center 2737 Centerview Drive Tallahassee, FL 32399-0950 APPENDIX The following constitute my specific rulings, in accordance with section 120.59, Florida Statutes, on findings of fact submitted by the parties. Findings of Fact submitted by Petitioner: Accepted in substance, except that the estimated increase in the insurance premium is determined to be $83,434. Findings of Fact submitted by Respondent: Accepted in substance. =================================================================
Findings Of Fact At all times pertinent to the issues herein, the Department of Insurance was the government agency in Florida responsible for the licensing of insurance agents and the regulation of the practice of the insurance profession in this state. Respondent, Alan Chappuis, was licensed in Florida as a life insurance agent, health insurance agent, general lines agent, and a life, health and variable annuity contracts salesman. Erna Swan, an 84 year old twice widowed lady, and the individual to whom Respondent sold the annuity policies in question, was unable, at the time of the hearing, to recall the names of either of her former husbands or when they passed away. She recalls that both husbands worked in insurance and that she has lived in the Pinellas County area for a long time, but cannot recall for how long. Mrs. Swan lives alone and can cook for herself and bathe and dress herself, but does not know how much her current income is or the source of that income. She was able to recognize Respondent as her insurance agent of several years standing, but cannot recall whether she ever purchased anything from him, and she does not know what Guarantee Trust Life Insurance Company is. She does not know what an annuity is or whether she ever wanted to buy one from the Respondent. By the same token, she cannot recall if he ever tried to sell her an annuity. Mrs. Swan has known Nadine Hopkins, a close friend, for about 10 years. She also recognizes Mr. Wells and Mr. Tipton, her attorney and stock broker respectively, but does not know what they do. Mrs. Swan maintains a room in her condominium apartment which she uses for an office where, before she was placed under the guardianship of Ms. Hopkins, she paid her bills and kept her business records, such as they were. She recalls that she had a brokerage account with Merrill Lynch but cannot remember what it was for or what type of securities were in it. She is familiar with Bayridge Baptist Church, of which she is a member, and she recognizes that she has given money to the church over the years. Mrs. Swan's driver's license was cancelled several years ago because, according to Ms. Hopkins, she felt she could not take the test required to renew it. Mrs. Swan does not recall this though she remembers she used to own a car. She cannot remember what kind it was. Mrs. Swan's apartment is paid for. There are no mortgage payments. She claims she still writes checks for her monthly bills by herself, but also notes that Ms. Hopkins does it. More likely it is the latter. She still answers her phone, answers her mail, and reads the newspaper. She is, however, obviously incompetent to testify to the nature of an annuity, and it is quite clear that at this time she would be unable to understand the provisions of an annuity contract and the difference between an annuity contract and an investment portfolio in another product. Mr. Tipton, formerly a stock broker with Merrill Lynch, first met Mrs. Swan in the early 1960's through a family member who worked at the family insurance agency. At that time Mrs. Swan and her husband had purchased the agency from his family, and in the years following the Swans stayed as friends of Mr. Tipton. Mr. Tipton became an investment advisor in 1981 to Mr. Swan who passed away sometime in either 1985 or 1986. He started buying U.S. Government bonds and thereafter moved to tax free investments. When Mr. Swan passed away, Mrs. Swan became the owner of the account. During 1992 and 1993, Mr. Tipton would see Mrs. Swan once or twice a month. At that time, toward the end of 1993, it was clear to him that her memory appeared to be slipping. She would not remember things they had talked about and was unable to participate fully in the decisions made on her investments. At the end of 1993, Mrs. Swan's portfolio with Merrill Lynch was valued at approximately $360,000, plus a money market balance of $18,000. The account statement for October, 1993 reflected she had 5 municipal bonds valued at $80,000, tax free bond funds valued at $273,620, and approximately $18,000 in money market funds. Her estimated annual income from the bonds was approximately $6,631, or approximately $520.00 per month. Her tax free bond funds income returned approximately $1,200 per month, and her Nuveen Fund, approximately $50.00 per month, giving her a grand total of approximately $1,800 per month investment income in addition to her Social Security monthly payment of somewhat in excess of $650. On December 20, 1993, Mr. Tipton, as a representative of Merrill Lynch, received a letter moving Mrs. Swan's account to another brokerage firm, located in Texas, but with a local representative. At that time, Mr. Tipton tried to stop the transfer by contacting his main office, but was advised that by the time he had received the letter, the transfer had been completed. Mr. Tipton wanted to stop the transfer because when he called Mrs. Swan to inquire about it, she indicated to him that she did not want her account moved. Several weeks later, Mrs. Swan called Mr. Tipton to find out where her Merrill Lynch monthly account statement was. She did not recall at that time that her Merrill Lynch account had been closed and the securities therein transferred to the Texas brokerage concern. Because of this call, sometime in early January, 1994, Mr. Tipton called Mr. Wells, Mrs. Swan's attorney, and set up a meeting for the three of them. There were approximately three meetings of the three of them between January and March, 1994. The substance of their discussions was the fact that the broker to whom the Merrill Lynch account had been transferred had liquidated her entire account and used the proceeds thereof to pay for the annuities sold to Mrs. Swan by Mr. Chappuis and his associate, Mr. Mednick. According to Mr. Tipton, up until this time, Mrs. Swan had never indicated any dissatisfaction with the interest and income she was earning on her Merrill Lynch brokerage account. Mr. Tipton absolutely denies there was any churning of her account to garner more commissions. The only transfer was a sale at a premium in February, 1993 of bonds of the Jacksonville Electric Authority to create more capital for investment to provide greater income. The brokerage account owned by Mrs. Swan was not insured against loss of principal though many of the particular funds in which much of the money was invested were, however, individually insured. In 1990, Mrs. Swan's account, which had been in her name individually, was transferred to a trust account of which she was the beneficiary for life, with the provision that at her death, the funds therein would be distributed to various religious organizations and a few friends. Mrs. Swan had no family heirs. No commission was earned by Mr. Tipton on the transfer, though he did receive a commission on both the above-mentioned sale of the Jacksonville Electric bonds and the purchase of a tax free bond fund with the proceeds. Her brokerage account permitted her to write checks on the funds in the money fund. Mr. Tipton claims he never engaged in a transaction regarding Mrs. Swan's account without first talking to her about it. In his opinion, whenever he did make a change she appeared alert and aware enough to participate effectively. The last major transaction was the 1990 bond sale, however. Mrs. Hopkins and Mrs. Swan attend the same church. In late 1993 or early 1994, Respondent's business card was always on Mrs. Swan's refrigerator. At no time did she ever speak disparagingly of him to Mrs. Hopkins, or complain about any insurance product he sold her. Mrs. Hopkins was not Mrs. Swan's guardian at that time and Mrs. Swan was paying her own bills, however not effectively. She was late getting them out and complained it was becoming difficult for her to type out the checks. According to Mrs. Hopking, Mrs. Swan was not extravagant in her spending. She did not take cruises, go to expensive restaurants or buy a lot of clothes. Mrs. Swan, in Ms. Hopkins' opinion, lived comfortably. She was generous in the terms of her charitable contributions. Since being appointed Mrs. Swan's guardian, Mrs. Hopkins had seen her financial records and she knows that Mrs. Swan donated a lot of money to various churches and religious organizations. Mrs. Swan received many requests for donations and indicated that as long as she had the money to give she would do so. In later years, however, as Mrs. Hopkins recalls, it became a physical and mental burden for Mrs. Swan to write the checks, and she frequently commented on this. Mr. Wells is Mrs. Swan's attorney, specializing in estate and trust planning. He met Mrs. Swan through a friend in 1990 and began to serve as her estate planner. In the spring of 1994 Mr. Wells met with Mr. Tipton and Mrs. Swan regarding the Respondent's sale of her security portfolio and the purchase of the two annuities in issue here with the proceeds. At that time Mrs. Swan seemed to have no knowledge of the transaction. As a result, he called Guarantee Trust Life Insurance Company to get some information on what needed to be done in order to bring about a recision of the policies, but before any action was taken, the entire matter was turned over to Mr. Keirnan, another attorney, who does trial work. As a result of Keirnan's efforts, approximately two weeks before the hearing, Mr. Wells, on behalf of Mrs. Swan, received a check in the amount of approximately $372,000 from Guarantee Trust and Life Insurance Company as full reimbursement of the premiums paid for the two annuities in issue. From the time the annuities were issued in December, 1993 and January, 1994, Mrs. Swan had only her Social Security check to live on. She also received a check from Guarantee for $5,000, at her request, at the time the policies were issued as the balance in her brokerage account over the amount required as premiums for the annuities. She received nothing from her annuities which, as set up, did not call for the payment of any monthly income. As a result, Mr. Wells felt it necessary to borrow between $15,000 and $20,000 at 8 percent for Mrs. Swan from other trusts he managed to provide funds for Mrs. Swan to live on. From the documents which Mr. Tipton and Mrs. Swan brought to him in March, 1994, Wells could determine that the two annuities were purchased for her but she, at that time, did not seem to know anything about them. Though the annuities offered several options to permit period withdrawal of principal and interest, none had been selected by Mrs. Swan and as they then existed, she would draw no income from them until she was 100 years of age. When Mr. Tipton and Mrs. Swan came to Mr. Wells' office and brought the paperwork showing she had sold her securities to buy the annuities, Mr. Wells called Respondent to find out what had happened to Mrs. Swan's money. About the same time, he drafted a letter to Respondent at Mrs. Swan's request in which she requested Respondent not contact her any more. This letter was written because Mrs. Swan had said Respondent had "pestered" her at home and upset her on some occasions before the letter was written. Guarantee's manager of Government Relations and Compliance, Mr. Krevitzky, identified the two policies issued to Mrs. Swan. According to Mr. Krevitzky, an annuity is a savings vehicle which holds funds over a period at interest with provision for single or periodic pay out. Interest on both annuities in issue here was guaranteed at a rate of 4.5 percent per year or higher. The first year, the policies earned only the guaranteed 4.5 percent interest, and the income was credited to the policy from January, 1994 until the policies were surrendered as a part of the litigation settlement on March 25, 1995. At that point, since it was considered that the policies were rescinded and therefore void ab initio, the interest earned was forfeited and not paid. Only the premiums paid in were refunded in total. The commission paid to the Respondent and his associate, Mr. Mednick, was paid out of company funds and not Mrs. Swan's funds. The annuity contracts sold by the Respondent to Mrs. Swan had options for five different pay-outs, some of which would have returned income to her during the pendency of the contract. However, none of these was selected by Mrs. Swan and there was no evidence to indicate that Respondent ever explained any of them to her. As they existed as of the date they were cancelled, and at all time up until then, Mrs. Swan would receive no income until the annuity matured at her age 100. This is an unreasonable situation for an individual of Mrs. Swan's age and situation. Mr. Krevitzky contends that the potential pay out options could have provided Mrs. Swan with a substantial income equal to or exceeding the income she was received from her securities portfolio. Most of these options would have included a partial return of principal, however, whereas the income from the prior held portfolio was interest only with her principal remaining intact. One option provided an income for a guaranteed period which, in some circumstances, could have resulted in her receiving more than the amount paid in for the contract. The ultimate fact remains, however, that at the time of sale, and at all times thereafter, notwithstanding the fact that Mr. Chappuis was directed to stay away from Mrs. Swan, he had failed to assist her in the selection of any income option and she was receiving no current income at all from the annuities. In each of the two years prior to the purchase, for 1992 and 1993, she had regular tax free investment income of between $26,000 and $27,000, in addition to the capital gains of approximately $23,000 from the sale of the bonds in 1992. It matters not that she needed little to live on or donated a great portion of her income to charity. This decision was hers to make. By the same token, it matters not that no request for income was made, during the pendency of the annuities, by or on behalf of Mrs. Swan. Annuities have several benefits over other types of investments, according to Mr. Krevitzky. One is the tax deferment provision for interest earned on the annuity. Another is the fact that, subject to local law, the principal of the annuity is not subject to garnishment. A third is the guaranteed return of principal at the end of the annuity which permits older annuitants to provide for their heirs while maintaining income during their lifetimes. Many senior citizens look to the safety of their investment rather than the taxability of the interest. Therefore, in selling annuities to seniors, the agents stress these factors and the no-probate consideration. David W. Johnson has been an independent contractor with Respondent's broker, Professional Systems Associates, since 1989 and is the annuity manager for the firm. Mr. Johnson indicates that there has been an increase in the annuity business with seniors in 1993 - 1994. Funds for the purchase of the annuities usually comes from bank certificates of deposit, but sometimes, like in the instant case, the funds come from a brokerage account. In his experience, seniors choose annuities over certificates of deposit and brokerage accounts. According to Mr. Johnson, if Mrs. Swan had wanted to stop the transfer from her account she could have done so up until the transaction was completed, even after the securities had been liquidated and the funds sent to Guarantee. This is so, he claims even though Mrs. Swan gave authority to make the transfer in the documentation accompanying her application for the annuities. Mr. Johnson indicated it takes about two weeks after the receipt of the premium before Guarantee issues the annuity contract and at any time before issue, the transaction could be cancelled and the money returned. Even after issue, there is a "free look" period during which the contract may be cancelled without penalty. Though the contract may be cancelled and the premium returned, the former securities are still liquidated and the brokerage account closed. According to Mr. Johnson, there was nothing in the paperwork regarding these annuities which he saw which would raise any flag for consideration. He did not feel it necessary to call Mrs. Swan to see if she really wanted the policy and he never received a call from her or anybody else regarding it. Mr. Chappuis' partner in this sale was Scott Mednick who has been a licensed insurance agent since 1984 and who is an independent contractor with the same agency. Mr. Mednick was solicited to accompany Mr. Chappuis to Mrs. Swan's home in December, 1994 because of his expertise in the annuity field. Respondent had described Mrs. Swan to him as a long time customer. Respondent claimed that Mrs. Swan had indicated she was concerned about her brokerage account and he wanted to show her some product, annuities, she might be interested in. Mr. Mednick has known Respondent for eleven years and knows him to be a top producer. Respondent's reputation is that he is cheap and close with the dollar. Nonetheless, Mr. Mednick claims he was not surprised that Respondent was willing to share the commission on this sale in order to be sure the client got the proper product. Mrs. Swan let Mr. Mednick examine her monthly statement from Merrill Lynch. It appeared to Mr. Mednick that the account had not grown over the years. This is not surprising in that the portfolio was made up solely of tax free bond funds, tax free municipal bonds and tax free money marts, the volatility of and fluctuation in price of which is minimal. Mr. Mednick cannot now recall if Mrs. Swan indicated she knew about her stocks. However, he relates that he and the Respondent suggested she look into annuities as an alternative which Respondent explained to her. In addition, he claims they provided her with a lot of written material. Based on Mrs. Swan's action, words and attitudes expressed, Mr. Mednick believed she completely understood what was explained to her and wanted to make the change. It was his belief she seemed to understand she would pay no commission on the purchase; that she would have a guaranteed income that she could not outlive; that the annuity avoided the volatility of the stock market; and it was not attachable by creditors. As structured and sold to Mrs. Swan, however, she was to get no income at all from this product until she reached the age of 100/. Mr. Mednick asserts that at no time did he feel that Respondent had less than the best interests of Mrs. Swan at heart and he can recall no time when Respondent lied to Mrs. Swan. All representations made by either Respondent or Mednick allegedly came from the brochures left with her. Mednick indicates that during their conversation, Mrs. Swan did not seem concerned about getting her principal out of the investment. She was most concerned about her desire to leave the principal to the church. Mednick claims that at the time of the sale, the two agents asked Mrs. Swan if she wanted her interest paid quarterly but she said to let it accrue. This representation, in light of the other evidence, is not credible. Taken together, Mednick's testimony does nothing to detract from Respondent's sale of this product, inappropriate as it was for this client, to Mrs. Swan. Mr. Mednick's credentials are somewhat suspect, and his credibility poor, however. By his own admission, he has been administratively fined by the Department on two occasions based on allegations of misconduct. He denies any misconduct, however, claiming he accepted punishment only as an alternative to a prolonged contest of the allegations. The allegations herein were referred to an investigator of the Department to look into. As is the custom of the Department, he did not interview the Respondent but merely sought to gather facts concerning each allegation to be sent to the Department offices in Tallahassee where the analysis and determination of misconduct is made. By the same token, he did not call or speak with Mrs. Swan, Mr. Mednick, or anyone at Professional Systems. He spoke with Mr. Tipton, Mr. Wells, Mrs. Hopkins and with Mr. Keirnan a couple of times.
Recommendation Based on the foregoing Findings of Fact and Conclusions of Law, it is, therefore: RECOMMENDED that the insurance licenses and the eligibility for licensure of the Respondent herein, Alan Chappuis, be suspended for nine months. RECOMMENDED this 22nd day of August, 1995, in Tallahassee, Florida. ARNOLD H. POLLOCK, Hearing Officer Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-1550 (904) 488-9675 Filed with the Clerk of the Division of Administrative Hearings this 22nd day of August, 1995. APPENDIX TO RECOMMENDED ORDER The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the parties to this case. FOR THE PETITIONER: 1. - 21. Accepted and incorporated herein. 22. & 23. Accepted and incorporated herein. 24. - 27 Accepted and incorporated herein. FOR THE RESPONDENT: Respondent's post hearing submittal was entitled "Respondent's Final Argument." However, because it makes specific Findings of Fact, the submittal will be treated as though it were Proposed Findings of Fact which will be ruled upon herein. First sentence accepted. Balance rejected as contra to the weight of the evidence. & 3. Accepted that Mr. Krevitzky testified and that there was nothing in the contract which would cause Respondent to misrepresent. The product may well be a worthy product for someone in a different financial position than Ms. Swan, and the issue is whether Respondent fully explained the implications and ramifications of the contracts to her. Rejected as a misconception of the nature of the witness' testimony. Rejected as contra to the weight of the evidence. First sentence accepted. Second sentence rejected. Irrelevant. Accepted as a summary of the witness' testimony. First and second sentences accepted. Balance rejected as an unwarranted conclusion drawn from the evidence. Accepted but irrelevant. COPIES FURNISHED: James A. Bossart, Esquire Department of Insurance 612 Larson Building Tallahassee, Florida 32399-0300 Alan Chappuis, Pro se P. O. Box 86126 Madiera Beach, Florida 33738 The Honorable Bill Nelson State Treasurer and Insurance Commissioner The Capitol, Plaza Level Tallahassee, Florida 32399-0300 Dan Sumner Acting General Counsel Department of Insurance The Capitol, PL-11 Tallahassee, Florida 32399-0300
The Issue The issue is whether Petitioner's application for a 25.75 percent increase for its individual long term care policy form, number 93710(FL), filed on February 7, 2006, meets the applicable tests of Section 627.410, Florida Statutes,1 and Florida Administrative Code Rule 69O-149.005, and should be approved. Also at issue is whether Subsection 627.9407(7)(c), Florida Statutes (as amended by Section 9, Ch. 2006-254, Laws of Florida, effective July 1, 2007), applies in this case; and, if so, the propriety of Respondent's intended implementation of that amended statute to Petitioner's rate filing, and whether Petitioner's rate increase filing should be disapproved due to Respondent's implementation of that statute.
Findings Of Fact Petitioner's rate increase application concerns policy form number 93710(FL), a stand-alone individual home health care policy form, which is a sub-line of long term care health insurance. The policy provides reimbursement for certain medical care delivered outside the in-patient hospital or nursing home setting. The policy form and initial rates for the form were first approved in Florida in 1994. The policy has not been actively sold since 1998, and the existing policies constitute a closed block of business. Periodic rate increases for this policy form have been approved in the past: 30 percent in 1998, 20 percent in 1999, 20 percent in 2000, 50 percent in 2001, 30 percent in 2002, and 25 percent in 2003. OIR has prior approval authority over the rate increase applied for by Petitioner. Petitioner timely sought a formal administrative hearing in this matter. Petitioner's rate filing seeks approval of a 25.75 percent rate increase. Christine Jung, the actuary who submitted the rate filing, is a qualified actuary who meets the Qualification Standards for Prescribed Statements of Actuarial Opinion published by the American Academy of Actuaries ("AAA"). Mr. Yee's opinion that Ms. Jung is not a qualified actuary is not persuasive. He could point to no provision in the AAA's Qualification Standards for Prescribed Statements of Actuarial Opinion that did not meet Ms. Jung's education, training, and experience when she submitted the rate filing at issue in this case. Any objections to Ms. Jung's qualifications go to the weight to be given her testimony when compared with the testimony given by the other actuarial experts in this matter. The greater weight of the evidence supports the fact that a rate increase of 25.75 percent meets the tests prescribed for approval in Florida Administrative Code Rule 69O- 149.005(2)(b). Petitioner's evidence, which is the more persuasive evidence, establishes that the requested rate increase meets the tests of that rule when anticipated future experience is projected properly, in accordance with sound actuarial techniques and Actuarial Standards of Practice ("ASOPs"). Ms. Jung concluded that a rate increase of 25.75 percent was actuarially appropriate based on her actuarial analysis. Ms. Dawn Helwig is a highly qualified health insurance actuary who specializes in rate analysis and rating of long term care insurance, including home health care insurance. Her testimony is persuasive. She evaluated Petitioner's rate filing and its component data, and performed an actuarial analysis using generally accepted actuarial techniques, and in accordance with the ASOPs and actuarial principles. Ms. Helwig concluded, and it is so found, that Petitioner's rate increase request of 25.75 percent is actuarially justified, will yield premiums that are not excessive in relation to the benefits offered under policy form number 93710(FL), and satisfies the tests for approval set forth in Florida Administrative Code Rule 69O- 149.005(2)(b)1.a. and b. Ms. Helwig concluded that a rate increase of 37.4 percent to 39.9 percent (depending upon whether industry medical trend is used in the first year of the rate projection) is actuarially justified based upon Petitioner's claims and premium experience reflected in the rate filing. By comparison, Ms. Jung's rate indication of 25.75 percent was conservative. Ms. Jung used an un-trended average of historical loss ratios to arrive at her starting loss ratio value (or current loss ratio) from which to project forward to determine Petitioner's rate need. Had Ms. Jung trended the claims costs in the three years of Petitioner's historical experience that she used to determine her starting loss ratio, her rate indication would have been higher than the 25.75 percent rate increase for which Petitioner applied. At the hearing, OIR offered three independent grounds for disapproving Petitioner's rate filing: 1) that the proposed rate increase was not based upon a "credible body of past data," which must have occurred over the lesser period of the past five years or at least 1,000 claims; 2) that the use of a medical trend has not been justified; and 3) that the rate increase would result in a rate higher than the OIR's published new business rate pursuant to Subsection 627.9407(7)(c), Florida Statutes. OIR did not assert, as a basis for denial, that Petitioner's requested rate increase would result in inadequate premium rates under Florida Administrative Code Rule 69O- 149.005(1), and no evidence was offered at the hearing that the requested rate increase would result in inadequate rates. Accordingly, it is found that Petitioner's requested rate increase would not result in inadequate rates. OIR did not assert, as a basis for denial, that Petitioner's requested rate increase would result in unfair discriminatory premium rates under Florida Administrative Code Rule 69O-149.005(1), and no evidence was offered at the hearing that Petitioner's requested rate increase would result in unfair discriminatory rates. Accordingly, it is found that Petitioner's requested rate increase would not result in unfair discriminatory rates. Mr. Keating interprets Florida Administrative Code Rule 69O-149.0025(6) to mean that, in developing the Florida and nationwide rate indications called for in Florida Administrative Code Rule 69O-149.0025(6), the actuary must use the five years of historical data that the Rule prescribes for weighing the separate Florida and nationwide rate indications for credibility. Ms. Jung derived her separate Florida and nationwide rate indications from the three most recent full years of Petitioner's data. Mr. Keating, therefore, asserted that Petitioner's requested rate increase is not supported by sufficiently credible experience data. The more persuasive evidence does not support Mr. Keating's opinion that the experience data Petitioner used to develop its rate request is not sufficiently credible. Mr. Keating's interpretation of Florida Administrative Code Rule 69O-149.006(3)(b)23.b.(II) is not borne out by the Rule's language. With reference to projecting rate need based on in-force experience, the portion of the Rule states as follows: The experience period shall reflect the most current data available, generally the most recent 12 months for coverage subject to medical inflation, or the period of time to determine the credible data pursuant to subsection 69O-149.0025(6), F.A.C. (emphasis supplied) That provision is disjunctive, and its use of the word "generally" connotes that its disjunctive indicators for experience periods are examples, not requirements. As Mr. Keating conceded at the hearing, neither that rule passage nor other related rules equate "the most current data available" with "the period of time to determine credible data pursuant to subsection 69O-149.0025(6), F.A.C." The rules thus leave to actuarial judgment the decision concerning "the most current data available" on which to develop the separate Florida and nationwide rate indications called for in the rules. The rules do not mandate that the actuary use five full years of data to develop the separate Florida and nationwide rate indications. The rules do require that, once those separate Florida and nationwide rate indications are developed, they are to be credibility-weighted using five years of data under Florida Administrative Code Rule 69O-149.0025(6) to arrive at the ultimate rate indication. This is what Ms. Jung did. OIR has not consistently required use of the five years of data as the experience period for making the separate Florida and nationwide rate indications. One of Respondent's exhibits, a Guarantee Trust Life rate filing for this same policy form, was approved by consent order, dated December 23, 2003. It used only the most recent calendar year's loss ratio as the starting value for projection, though there were fewer than 1,000 claims in that calendar year. The more persuasive evidence shows that Mr. Keating's interpretation would double-count the credibility factor in the rules. Moreover, the more persuasive evidence shows that applying Mr. Keating's interpretation of the credibility weighting method set forth in Florida Administrative Code Rule 69O-149.0025(6)(e)3. as "equivalent to" the alternative methods described in Florida Administrative Code Rule 69O-149.0025(6)(e)2. would, in fact, not yield equivalent results for the same data set, as a matter of mathematics. Ms. Jung developed a rate indication based on Petitioner's Florida experience under policy form 93710(FL), and a separate rate indication based on Petitioner's nationwide data on that policy form. She used the most recent three full years of experience on the policy form (2002-2004) which she found to be appropriate current data for developing Florida and nationwide rate indications. After separately deriving an indicated rate increase from Florida data and a rate increase indicated by total nationwide data, consistent with Florida Administrative Code Rule 69O-149.0025(6)(e)3., she then weighed the two separate rate indications for credibility by weighting the resulting rate changes from each district analysis by the credibility of each distinct component assigned by that rule. Her analysis resulted in a 25.79 percent rate increase need, which she rounded down to 25.75 percent. Florida Administrative Code Rule 69O-149.0025(6) establishes the acceptable range for credible data (the number of claims needed for making rate projections) and the procedures for weighting the data for credibility when the claims frequency used in rate projections falls between the Rule's upper and lower bounds of acceptability. A frequency of at least 1,000 claims over the five years preceding the rate filing is given 100 percent, or full, credibility. Two hundred claims or fewer are given no (zero percent) credibility. Claim frequency counts falling between 200 and 1,000 receive a proportionate credibility weight under the formulae in Florida Administrative Code Rule 69O-149.0025(6)(e), which provides, in pertinent part: (b)1. For policy forms . . . such as accident and long term care, at least 1,000 claims, over a period not to exceed the most recent 5-year period, shall be assigned 100 percent credibility; 200 claims shall be assigned 0 percent credibility. * * * (e)1. Florida only experience shall be used if it is 100 percent credible. 2.a. If Florida experience is not 100 percent credible, a combination of Florida and nationwide experience shall be used. The Florida data shall be given the weight of the ratio of the Florida credibility to the nationwide credibility. For example, if Florida data is 10 percent credible and nationwide is 40 percent credible, the Florida data will be given the weight of [10%/40%] 25 percent. The nationwide data shall be given the weight of the ratio of the nationwide credibility less the Florida credibility to the nationwide credibility. In the above example, the nationwide data will be given the weight of [(40%-10%)/40%] 75 percent. The data is combined using the indicated weights (in the example above, the experience data would be weighted 25%/75%). The combination of the two weights will always equal 100 percent. A rate change is determined from the blended data. 3. The analysis in subparagraph 2. above is equivalent to determining the indicated rate increase from the Florida only data and the total nationwide data separately, and then weighting the resulting rate changes from each distinct analysis by the credibility of each distinct component. Ms. Jung's separate Florida and nationwide rate indications were based on claim counts that fall within the credibility range posted by Florida Administrative Code Rule 69O-149.0025(6)b.1. The number of claims in the last three years of data from which Ms. Jung derived her Florida and nationwide rate indications exceeded 200 claims, in each case. Ms. Jung applied five full years of company claims data to combine her Florida and nationwide rate projections, that is, to separate rate indications for credibility in arriving at the ultimate indicated rate need of 25.75 percent. She did so properly, in accordance with the provisions of Florida Administrative Code Rule 69O-149.0025(6)(e)3. Moreover, in her actuarial projections of Florida and nationwide rate indications, Ms. Helwig, Petitioner's consulting actuary, used the five years of Petitioner's historical experience data that Mr. Keating believes should be used. Ms. Helwig concluded that a rate increase of at least 25.75 percent was actuarially justified, and that the full five years of data would support an increase of up to 39.9 percent in her opinion. Mr. Yee, Respondent's actuarial expert, testified that in his opinion neither Ms. Jung's analysis nor Ms. Helwig's analysis is based on a sufficient number of claims to be regarded as adequately credible. The premise for Mr. Yee's opinion is his personal, subjective standard for "fully credible" long term care ("LTC") data. Mr. Yee's full-credibility standard contradicts the full- credibility standards for LTC ratemaking prescribed by Florida in Florida Administrative Code Rule 69O-149.0025(6). Florida Administrative Code Rule 69O-149.0026(6)(b)1. provides that for LTC forms, "at least 1,000 claims, over a period not to exceed the most recent 5-year period, shall be assigned 100 percent credibility; 200 claims shall be assigned 0 percent credibility." The Rule thus prescribes that 1,000 LTC claims over five years are to be considered fully credible; that 200 claims is the credibility floor; and it establishes methods for weighting the credibility value of claim counts falling between 200 and 1,000. Contrary to the Florida rule, Mr. Yee holds the view that at least 3,246 LTC claims are required for "full credibility." Based upon his "full credibility" premise, he believes that at least 649 claims are needed to consider LTC data credible enough for making a rate projection. He arrives at his 649-claim credibility minimum by noting that since 200 claims in the Rule (the credibility floor) is 20 percent of the 1,000 claims assigned full credibility by that Rule, 649 is the minimum number of claims required for making a LTC rate projection (20 percent of 3,246). Since Petitioner's data contains 621 claims for the most recent five-year period, less than the 649 claim floor, Mr. Yee concludes that Petitioner's data is not credible, and, therefore, should not be used for making a rate projection. He, therefore, concludes that the rate increase is not justified by either Ms. Jung's or Ms. Helwig's actuarial analysis. However, Mr. Yee's data credibility opinion directly conflicts with Florida Administrative Code Rule 69O-149.0025(6). The Rule is clear that 1,000 claims or more shall be accorded full credibility for LTC ratemaking and that claim counts falling between 200 and 1,000 are to be credibility-weighted as set forth in the Rule. Mr. Yee concedes that his "full credibility" standard, the foundation of his no-credibility opinion, is a subjective standard that he and four other actuaries recommended in a report to the National Association of Insurance Commissioners on the subject of LTC data credibility. He further concedes that his "full credibility" standard has not been adopted by any regulatory body or embraced by AAA. It has not even been circulated for comment to the AAA membership. Mr. Keating testified that a claims frequency of 1,000 claims should be regarded as fully credible for LTC ratemaking under the Florida rules. Mr. Yee's opinion, while interesting and apparently well-intended, is, therefore, not credited. The more persuasive evidence shows that Petitioner's data is adequately credible under Florida's adopted standards, and was properly used by Petitioner's actuaries in developing the rate indications supporting Petitioner's requested rate increase. Although in its interrogatory responses OIR stated that Petitioner failed to adjust earned premium on a current rate basis, Mr. Keating testified at hearing that Petitioner had, in fact, provided earned premium on a current rate basis. Therefore, this asserted reason for denial of Petitioner's rate increase is not supported by the evidence. The actuaries who testified agreed that putting both historical premiums and losses (claim costs) on a "current basis" or a "current rate basis" is actuarially appropriate in order to arrive at the correct starting point for a rate projection (whether that starting point is expressed as a loss ratio on a current basis or claim costs on a current basis), and that an accurate current starting point is centrally important in making and evaluating rates. However, neither the phrase "earned premium on a current rate basis" nor the terms "current rate basis" or "current basis" is defined in Section 617.410, Florida Statutes, or in Florida Administrative Code Rule 69O-149, Part I. Moreover, the statutes and rules do not prescribe how to arrive at a "current rate basis" starting value for rate projection. The propriety of a "current rate basis" technique, therefore, must be judged by whether it comports with the ASOPs and accepted actuarial principles. The major point of contention among the actuaries who testified was on the question of the appropriate "current rate basis" methodology for determining the starting value for future projection (the correct starting loss ratio on a current rate basis or the correct starting claims cost on a current basis). Mr. Keating made what he refers to as a "current rate basis" adjustment to Petitioner's historical data. He testified that, based on his current rate basis adjustment, he estimated the "current rate basis" Actual-to-Expected (A/E) ratio for Petitioner's historic Florida experience to be 95.41 percent, which he testified results in a current-rate-basis starting loss ratio value of 74.34 percent for making a rate projection. Mr. Keating applied that 74.34 percent starting-point value, and restructured Petitioner's rate projection, culminating in his estimate of a future A/E ratio for Florida of 96.66 percent. Since, according to his restructuring, the future A/E ratio is less than 1.0, he concluded that Petitioner failed to meet the "Anticipated Loss Ratio" test of Florida Administrative Code Rule 69O-149.005(2)(b)1.a. He performed the same analysis, using the same "current rate basis" method on Petitioner's nationwide data, and reached the same conclusion. The more persuasive evidence, however, shows that the "current rate basis" adjustment Mr. Keating made to Petitioner's data does not comport with the ASOPs and the Florida rules. His "current rate basis" analysis yields starting values for projecting Petitioner's need (his starting loss ratio of 74.34 percent for Florida data and 76.66 percent for nationwide data), which do not match Petitioner's recent experience, and which, in fact, Petitioner has not experienced since 2002, even when Petitioner's historical experience is adjusted by earned premium on a current rate basis. Under Mr. Keating's starting loss ratio of 74.34 percent, and the corresponding number of claims implied by that loss ratio, Ms. Helwig demonstrated that if Mr. Keating's starting loss ratio were correct (if it were the true mean loss ratio), then the probability of Petitioner experiencing the actual number of claims it has in fact experienced in the two- to three-year period before 2005 is less than one percent. ASOP 25, which instructs that the methods an actuary uses should produce a starting value with less than a one percent probability of occurrence, is not found to be reasonable. ASOP 8 instructs that the actuary is to adjust past experience, specifically historical loss ratios, for trends in morbidity in a way that reasonably matches claim experience to exposure. Mr. Keating's current rate basis method did not do so. The more persuasive evidence shows that Mr. Keating's "current rate basis" analysis does not comport with ASOP 8, which provides that when past experience is used to project future results, both past premium rates and morbidity (claims experience) should be adjusted to reflect changes and trends. Mr. Keating did not recognize or take into account the claims trend in the company's historical experience when coming to his "current rate basis" A/E ratios and his starting values for the restated projections he made from Petitioner's data. To derive the "current rate basis" A/E ratios of 95.41 percent (Florida) and 98.53 percent (nationwide), which he then used to develop starting loss ratios of 74.34 percent based on Florida data and 76.66 percent based on nationwide data, Mr. Keating simply took a weighted average of 4.75 years of Petitioner's historical A/E ratios (each year's A/E ratio, as adjusted by earned premium on a current rate basis). Mr. Keating did not trend Petitioner's historical data to arrive at his current basis A/E ratios and his starting-point loss ratio values. To derive the "current rate basis" starting point A/E ratios, Mr. Keating used an average of Petitioner's historic yearly A/E ratios, and did not trend the yearly A/E ratios, based upon this rationale: In his view, only medical (utilization) trend should be used to trend historical data, since he believes that "aging" trend should be pre-funded in the initially approved premium for any long term care product. Since he believed that Petitioner had not sufficiently identified medical "utilization" trend separately from the "aging" trend in the historical data, Mr. Keating, therefore, averaged Petitioner's historical experience and did not apply any trends in the company's claims experience when arriving at his starting loss ratio. The actuaries, four of whom testified at hearing, disagreed about whether, in the context of making projections of future anticipated experience from a current-basis starting- point value, Petitioner's actuaries properly isolated medical (utilization) trend from "aging" trend, and whether, therefore, utilization trends should be used in projecting forward. The more persuasive trend, as discussed more fully below, shows that utilization trend over and above aging trend is adequately identified in the company's data, and was appropriately used for projecting forward. That debate, however, is separate from the issue of whether an actuary may ignore trend in a company's historical data to develop the current-basis starting-point for projecting into the future. The more persuasive evidence is that the ASOPs require the actuary to take trend in the company's historical data into account in coming to a starting-point value for future projection (the current basis loss ratio or current basis claims cost), regardless of whether the historical trend is categorized as "medical," "aging," or otherwise. The more persuasive evidence is that, if the actuary fails to recognize and take into account historical trend in evaluating the starting point for a future projection, the starting-point value will be actuarially incorrect, thus making the future projection incorrect, regardless of whether, for purposes of the future projection, the actuary includes a medical trend assumption or excludes it. The persuasive evidence on this point is reinforced by the language of Florida Administrative Code Rule 69O- 149.006(3)(b)18. That Rule passage calls for differentiating between medical (utilization) trend and insurance (aging) trend in making "trend assumptions." "Assumptions" about medical trend or aging trend denotes something the actuary assumes to be the case for future periods, not something that is an observable past fact. In contrast, a company's historical claims experience, which must be taken into account in arriving at the starting value for a rate projection, is a directly observable fact, not an assumption. Likewise, the trend in a company's past experience is a directly observable fact, not an assumption. According to the more persuasive evidence and the applicable ASOPs, an actuary may not disregard such observed historical claims trend in arriving at a "current basis" starting point to make future projections. Mr. Keating arrived at his starting-point values without considering and accounting for trend in Petitioner's historical data. His methodology was, therefore, actuarially flawed. If Mr. Keating had properly accounted for historical trend in his evaluation, his starting-point loss ratio values would have been approximately 113 percent, which compares closely with Ms. Helwig's starting value of 107 percent. His projection would, therefore, have resulted in a future A/E ration of 148 percent, which calls for approval of Petitioner's rate request under the "Anticipated Loss Ratio" test of Florida Administrative Code Rule 69O-149.005(2)(b)1.a. Ms. Helwig properly took historical trend into account in reaching the starting value for her future projections, and concluded that the appropriate starting value was a loss ratio of 107 percent. Her projections show that Petitioner's rate increase application meets the approval tests of Florida Administrative Code Rule 69O-149.005(2)(b)1. Ms. Jung used a 10 percent medical trend assumption, for one year only, in her projection forward of anticipated experience, appropriately weighted under Florida Administrative Code Rule 69O-149.0025(6). Ms. Helwig also assumed medical trend, likewise for one year only, in her projection of anticipated experience, appropriately weighted under Florida Administrative Code Rule 69O-149.0025(6). The more persuasive evidence shows that using medical (utilization) trend in projecting forward in this case is appropriate, and the medical trend values used by Petitioner's actuaries for projection are reasonable and appropriate. Florida Administrative Code Rule 69O-149.006(3)(b)18. provides that, when making future projections, medical trend (which includes "utilization" trend) may be used, but "aging" trend may not be included. The Rule directs the actuary to "make appropriate adjustments to claims data to isolate the effects of medical trend." The evidence demonstrates that Ms. Helwig appropriately adjusted Petitioner's claims data to isolate the effects of the medical (utilization) trend, and properly included utilization trend in her projections. "Aging" trend refers to the expected increase in frequency of claims as policyholders' ages increase after policies are originally issued. As Ms. Helwig persuasively testified, companies filing original rates for long term care policies make an actuarial assumption about what the expected increase in claim frequency due to aging will be over the life of the policies, which is commonly understood by health actuaries to be aging trend. The aging trend assumption is incorporated into the durational loss ratio curve (or table) for the policy form, approved by Respondent when the policy form and its original rates are approved. The originally approved premium rate is intended to cover increases in claims frequency assumed in the durational loss ratio curve, that is, increase over time in claim frequency from aging, assumed in the durational loss ratio curve, is pre-funded by the originally- approved premium rates. As Ms. Helwig persuasively testified, increases in claims frequency, over and above the aging trend originally assumed in the durational loss ratio curve, is utilization trend, which is properly included in medical trend. It is an experienced trend in claims frequency that exceeds the trend which was originally assumed, and that exceeds what was assumed to be pre-funded in the originally approved premium rate. Ms. Helwig testified, without contradiction that, in Petitioner's five years of experience, she evaluated that a clear, observable trend exists in the frequency of claims that exceeds the frequency trend assumed in Petitioner's approved durational loss ratio curve, and that this excess claims frequency trend was not pre-funded in the original approved premium rate. She, therefore, subtracted the aging trend assumed in the durational loss ratio curve from the average observed total trend, and properly included the excess utilization trend as medical trend in evaluating the propriety of Petitioner's requested rate increase. She properly isolated the effects of medical trend, and properly included the medical trend, so derived, in her experience projections. Mr. Keating's and Mr. Yee's opinions on the use or non-use of medical trend to make projections in this case, under Florida Administrative Code Rule 69O-149.006(3)(b)18., are not persuasive. Both Mr. Keating and Mr. Yee testified that Petitioner had not "separately identified" (isolated) medical trend, in their opinion, and thus use of medical trend in projecting future experience to derive rates for Petitioner's policy is not justified. However, both of Respondent's actuaries based their opinions on the assumption that all utilization increases were intended to be pre-funded in the rates originally submitted and approved for this particular policy form (i.e., that all claims frequency increases were intended to be subsumed in the aging trend originally included in the durational loss ratio curve when the initial premium rate for this policy form was proposed and approved). They, therefore, assumed that all frequency increases under this policy form must be aging trend, and, therefore, that no utilization increase in the company's experience can be treated as part of medical trend for this product. However, Mr. Keating's and Mr. Yee's assumption on this point is contradicted by the evidence. The actuarial memorandum for the original 1994 rate filing (which Respondent approved) clearly noted that the initial premium rate for this particular policy form was not intended to fully pre-fund all expected utilization increases, and that utilization increases in excess of what is pre-funded in the original premium rate would be funded by periodic rate increases. Mr. Keating and Mr. Yee did not consult the original rate filing and the original actuarial memorandum in forming their opinions. As Ms. Helwig testified, and it is concluded here, it is consistent with how the premium rate for this particular policy form was initially filed and approved to classify, as medical trend, the utilization trend in the company's experience that exceeds the utilization frequency assumed in the durational loss ratio curve. Mr. Yee and Mr. Keating additionally offered the opinion that medical trend was not justified because Petitioner's data was insufficiently credible. These opinions are not credited. Petitioner's actuaries used adequately credible data in their analyses under the standards set forth in the Florida rules, as discussed above. Respondent disagreed at hearing with Ms. Helwig's use of industry medical trend in her projections. However, the more persuasive evidence shows that Ms. Helwig properly used industry medical trend. The industry medical trend value she used was derived from the Milliman Claim Cost Guidelines, adjusted to Petitioner's benefit structure and in-force business. The Milliman Claim Cost Guidelines are the type of data health actuaries reasonably rely upon in reaching professional opinions in their field. Ms. Helwig gave appropriate credibility weight to the industry medical trend she used in her projections, in accordance with Florida Administrative Code Rule 69O- 149.0025(6). Moreover, she testified without contradiction that, even if industry medical trend were excluded from her projections, the indicated rate need from her analysis would still meet or exceed the 25.75 percent rate increase for which Petitioner has applied. Mr. Keating and Mr. Yee testified that Petitioner's rate increase application should not be approved because Petitioner should have filed a new durational loss ratio curve for approval, and phased-in the resultant rate increase over time, rather than making a periodic rate increase filing, as Petitioner chose to do. Respondent did not assert this as a basis for denial in its denial letter, in its interrogatory responses, or otherwise before hearing. Petitioner chose to present evidence on this issue, and on the more persuasive evidence, Mr. Keating's and Mr. Yee's opinions that Petitioner was required to file a new durational loss ratio curve are not found to be persuasive. Both of Respondent's actuaries rest their opinion upon their interpretation of two provisions in Florida Administrative Code Chapter 69O-149, Part I. Their interpretation does not comport with the plain language of the rules they rely upon. Respondent's actuaries testified that Florida Administrative Code Rule 69O-149.006(3)(b)20. requires Petitioner to file a new durational loss ratio curve (or table), rather than seek a periodic rate increase, when company experience shows utilization exceeding what was assumed in the existing loss ratio curve. That subsection reads, in pertinent part, as follows: [The actuarial memorandum for a rate increase] shall also include the current approved durational loss ratio table for the form. If a revised durational loss ratio table is being proposed, the proposed table, together with a justification for the new table, shall be provided. The proposed new table shall be consistent with the claim projections contained in the new filing. If approved, the new table will be used in filings made subsequent to the one in which it is being proposed. (V)(A) When the slope of the shape of the durational loss ratio table is changed . . . from those used in the last approved rate filing, any rate increase due to the change shall be uniformly implemented over a 3 year period. Contrary to Mr. Keating's and Mr. Yee's views, the plain language of this Rule does not require Petitioner to propose a revised curve. The Rule prescribes a particular course of conduct if a revised curve is proposed, but that does not require that the rate filer propose a new curve. Mr. Keating and Mr. Yee also testified that Florida Administrative Code Rule 69O-149.0025(7)(a) required Petitioner to file a new durational loss ratio curve. These opinions are inconsistent with the plain language of that Rule, as well. That Rule provides, in pertinent part: (a)1.a. The company shall adjust the durational loss ratio table when the average annual premium at the time of filing results in a loss ratio standard pursuant to the provisions of subsection 69O-149.005(4), F.A.C., that is changed by at least .5 percent from the current lifetime loss ratio standard for the form. b. Each loss ratio in the durational loss ratio table shall be increased by the ratio of the loss ratio standard determined from the current average annual premium divided by the prior lifetime loss ratio standard . . . . This Rule refers to Florida Administrative Code Rule 69O- 149.005(4). Florida Administrative Code Rule 69O-149.005(4), in turn, contains tables setting out minimum loss ratio standards (and formulas for revising minimum loss ratio standards in those tables) for some types of health insurance policies: policy forms whose loss ratio standards are subject to change based on the average annual premium at the time of the rate filing. Florida Administrative Code Rule 69O-149.005(4), however, explicitly excludes long term care policies. It provides: These tables are not applicable to Medicare Supplement or Long-Term Care Policy Forms. The minimum loss ratios for those policy forms are found in Rule Chapters 69O-156 and 69O-157, respectively. Florida Administrative Code Rule 69O-149.005(4) excludes long term care policies because, unlike the types of policies governed by Florida Administrative Code Rule 69O-149.005(4), the minimum loss ratio standard for long term care policies does not change when the average annual premium changes. The minimum loss ratio standard for long term care policies is a constant value, as stated in Florida Administrative Code Rule 69O- 157.022. Florida Administrative Code Rule 69O-149.0025(7) only requires a revised durational loss ratio curve to be submitted for policy forms whose minimum loss ratio standards are subject to change under Florida Administrative Code Rule 69O-149.005(4). As noted, that is not true of long term care policies. Accordingly, Mr. Keating's and Mr. Yee's opinions that this rule required Petitioner to submit a new durational loss ratio curve are not persuasive. Both Mr. Keating and Mr. Yee further suggested that Petitioner should file a new durational loss ratio curve, rather than seek a periodic rate increase, because of their assumption that all utilization (frequency) increases for long term care policies should have been pre-funded in the rates originally submitted and approved for the product. In other words, they opine, all claim frequency increases should be included in the aging assumption of the original durational loss ratio curve for a long term care policy. Whatever the accuracy of that assumption may be as to the rate structure of long term care products in general, the evidence shows it is factually incorrect as to this particular product. The actuarial memorandum for the initial, approved rate filing for this particular policy form clearly noted that the initial premium rates were not intended to fully pre-fund all expected utilization increases. The rate structure approved by Respondent for this product expressly contemplated that utilization increases, in excess of the utilization trend assumed in the initial durational loss ratio curve, would be funded by future periodic rate increases. Consistent with that approved rate structure, Respondent has approved several periodic rate increases for this product (most recently by consent order in 2003), and did not previously take the position that Petitioner should file a revised durational loss ratio curve. Respondent's actuaries' opinions on this point are contradicted by the evidence and are not persuasive. Mr. Yee opined that annual variation or volatility in Petitioner's claim reserves may mean that the claim reserves in Petitioner's data may not actually reflect the company's true experience. He thus concluded that a rate increase was not justified. Respondent did not assert this as a basis for denial in its denial letter, responses to interrogatories, or otherwise prior to the hearing. Nevertheless, Petitioner presented evidence on the issue, and on the more persuasive evidence Mr. Yee's opinion is not persuasive. Mr. Keating did not testify that annual variation in Petitioner's claim reserves was cause to deny the rate increase, and did not mention any concern over annual claim reserve variation as a basis to deny the rate increase. Mr. Yee admitted that trending and averaging of the data smoothes claim reserve year-to-year volatility. Ms. Helwig persuasively testified that the observed claim reserve variations correspond closely with observed annual fluctuations in claim frequency, and that averaging Petitioner's claims history (as both she and Ms. Jung did) smoothes year-to-year data variability. The more persuasive evidence does not support Mr. Yee's opinion on this point. Mr. Yee testified that he believed there was a discrepancy between current premiums on this book of policies and "active life reserves" displayed in Ms. Jung's actuarial memorandum supporting the filing. Mr. Yee characterized the discrepancy as "alarming," but did not offer an objective basis for that characterization. He testified that, because Ms. Jung did not explain the active life reserves in her actuarial memorandum, he concluded that she was not qualified to make the filing, and it should, therefore, be disapproved. Respondent did not assert this as a basis for denial in its denial letter, its interrogatory responses, or otherwise before hearing. Nevertheless, Petitioner presented evidence on the issue, and on the more persuasive evidence Mr. Yee's opinion is not persuasive. On cross-examination, Mr. Yee testified that a rate filing actuarial memorandum is not intended to be a reserve opinion by the actuary, and that annual reserve opinions are separately made. Mr. Yee also testified that companies often pool active life reserves across policy forms, and he does not know whether Petitioner's reported active life reserves are the result of such multi-policy-form pooling, or pertain exclusively to policy form 93710(FL). He admitted he had no personal knowledge concerning the accuracy of Petitioner's life reserves displayed in Ms. Jung's actuarial memorandum. He, therefore, has no factual basis to question them. He further conceded that neither Florida Administrative Code Rule 69O- 149.006, nor applicable ASOPs place any obligation on Petitioner or its actuaries to provide explanation in the rate filing actuarial memorandum concerning the reported life reserves. Mr. Keating did not request any further explanation from Petitioner concerning its reported life reserves, did not list a deficiency of explanation concerning life reserves as a basis for denial, and did not testify that he asked for more explanation concerning life reserves, or found the absence of explanation a reason for disapproving Petitioner's rate increase filing. Ms. Helwig testified that active life reserves play no role in evaluating the appropriateness of a proposed rate for a home health care product. Consistent with her testimony, Florida Administrative Code Rule 69O-149.006(3)(b)17. expressly provides: "Because these [active life] reserves do not represent claim payments, but provide for timing differences, they shall not be included in any benefit and loss ratio calculations." The Rule expressly acknowledges that active life reserves are not material to evaluating whether the benefit/premium relationship, often expressed in terms of loss ratios, meets the rules' tests for approval of the requested rate. Mr. Keating testified that certain data inconsistencies in Ms. Jung's actuarial memorandum supporting the rate increase filing were not significant, and did not affect his review or his conclusions. Respondent did not cite these minor data discrepancies as a basis for denial. Ms. Jung testified that the data discrepancies were immaterial, and did not affect her rate analysis. It is found that the data inconsistencies are immaterial to the issues to be decided in this case, and are not a basis to deny Petitioner's requested rate increase. As noted in the Preliminary Statement above, before the final hearing, Petitioner made a Motion to Strike and Motion in Limine, directed to Respondent's assertion that amended Subsection 627.9407(7)(c), Florida Statutes, would serve as an additional basis for the disapproval of Petitioner's rate increase. Respondent asserted this additional basis for the first time in its statement of position in the Pre-Hearing Stipulation filed in this matter. Petitioner's Motion was denied at the time it was made in order to hear evidence as to how Respondent intended to implement and apply the amended statute to Petitioner's rate filing. Numerous facts were elicited at hearing that bear on the applicability of Subsection 627.9407(7)(c), Florida Statutes. Section 9, Chapter 2006-254, Laws of Florida, amended Subsection 627.9407(7), Florida Statutes, in June 2006, after this rate filing was made and disapproved. Section 9 (creating Subsection 627.9407(7)(c), Florida Statutes) provides, in part, and Section 11, Chapter 2006-254, Laws of Florida, provides in pertinent part: (c) Any premium increase for existing insureds shall not result in a premium charged to the insureds that would exceed the premium charged on a newly issued insurance policy, except to reflect benefit differences. If the insurer is not currently issuing new coverage, the new business rate shall be as published by the office at the rate representing the new business rate of insurers representing 80 percent of the carriers currently issuing policies with similar coverage as determined by the prior calendar year earned premium. Section 11. This act shall apply to long- term care insurance policies issued or renewed on or after July 1, 2006. Petitioner is not issuing new coverage under this policy form. Amended Subsection 627.9407(7)(c), Florida Statutes, is not self-executing in its application to insurers, such as Petitioner, that are not issuing new coverage. As to Petitioner (and similarly situated insurers), Respondent implemented amended Subsection 627.9407(7)(c), Florida Statutes, by publishing benchmark charges, developed by Respondent, to which Petitioner's rates were compared. In developing its published benchmarks, Respondent made a number of policy decisions, which are discussed below. Respondent posted its benchmark charges on its website in late September of 2006. Well before hearing, while a meaningful opportunity for discovery still was available to Petitioner, Respondent had ample opportunity to notify Petitioner that it would be asserting its benchmarks as additional grounds for the disapproval of Petitioner's rate increase filing. Respondent could have done so by amending the denial letter or by amending its interrogatory responses. Respondent failed to do so. Respondent asked to continue the final hearing scheduled for November 21, 2006, which was granted, and never asserted as a basis for the continuance that it intended to assert a new basis for denial of Petitioner's rate increase filing, namely, the implementation of the amended statute. Respondent did not even assert the amended statute as a further basis for denial at a deposition taken by Petitioner of its actuary and designated agency representative, Mr. Keating, on November 30, 2006. Mr. Keating was specifically asked at that deposition whether Respondent intended to assert any additional bases for disapproval of Petitioner's rate filing. Mr. Keating responded that Respondent had no such intention. Had Respondent given timely advance notice, Petitioner would have had a fair opportunity to take discovery on the issue, to amend its Petition, or both. Prior approval of Petitioner's rate increase is an authorization required by law before it can implement the rate pursuant to Subsection 120.52(15) and Section 627.410, Florida Statutes. Respondent did not assert this additional basis for disapproval until December 22, 2006, after discovery had been completed. In light of this late date and the intervening holidays, Respondent's delay deprived Petitioner of a fair and meaningful opportunity to take discovery and prepare to defend Respondent's assertion at the final hearing beginning January 3, 2007. Since Petitioner could not implement the new rate unless and until the proceedings were completed and it received approval, additional continuances and delays would only have served to further prejudice Petitioner's position. Additionally, Respondent's proposed implementation and application of amended Subsection 627.9407(7)(c), Florida Statutes, constitutes agency action that determines Petitioner's substantial interests on the basis of non-rule policy. Numerous facts support this finding. Amended Subsection 627.9407(7)(c), Florida Statutes, is not self-executing to insurers like Petitioner that are not issuing new coverage. Respondent made policy decisions on several matters to implement the statute and to apply it to Petitioner, including: 1) What constitutes "similar coverage;" 2) Which insurers comprise 80 percent of carriers currently issuing policies "with similar coverage" for purposes of developing the benchmarks; 3) Within that 80 percent of carriers, whether the charges of each carrier are to be given equal weight in developing the benchmark charges, or instead, will be weighted according to each carrier's percentage of the previous year's earned long term care premium; 4) Since the carriers whose charges are used in developing benchmarks offer multiple home health care policy forms and various benefit levels and correspondingly varying premium charges, which particular charges by those carriers will be used in developing the benchmark charges; 5) What information, if any, other than the published benchmark charges will be used in making the comparison called for by the statute; and 6) What claims experience adjustments, if any, to the published benchmark charges will be used to make the comparison. When Respondent first gave notice, on December 22, 2006, that it would assert benchmarks under Subsection 627.9407(7)(c), Florida Statutes, Petitioner promptly put Respondent on notice that it believed the benchmarks to be non- rule policy assertions by the agency, by filing its Motion to Strike and Motion in Limine on December 27, 2006. Respondent did not in any manner publish the benchmarks it actually used to make the Subsection 627.9407(7)(c) comparison to Petitioner. The benchmarks Respondent published were developed for benefit configurations that are materially different from the benefit configurations in Petitioner's policy. Mr. Keating made a number of adjustments to the published benchmarks in making his comparison with Petitioner. However, none of these adjusted benchmarks were published in any manner, and Mr. Keating could not recall details of the methods by which the adjustments were made. Respondent compared Petitioner's rate filing to unpublished information, contrary to the plain language of Subsection 627.9407(7)(c), Florida Statutes. Respondent was aware of 20-25 insurers who would be affected by the published benchmarks, yet did not serve any affected insurer, including Petitioner, with a copy of the benchmarks published; and did not offer any of them a point of entry to proceedings in which to explore and test the adequacy or validity of Respondent's benchmarks. The published benchmarks developed by Mr. Keating for Respondent gave more than 92 percent weight to just one company- -Bankers Life. Two other companies' charges were also used, but Mr. Keating gave less than five percent combined weight to them. Mr. Keating did not give equal weight to the selected charges of the three insurers chosen as benchmark companies. Instead, he gave greater weight based upon the companies' prior year earned premium. He offered no actuarial basis for this decision. He also offered no testimony about the other companies' charges and what the posted benchmark values would be had he given equal weight to all three companies' charges. Respondent offered no point of entry for proceedings to question the decision. Mr. Keating also selected the lowest Bankers Life charges to develop the published benchmarks. He gave no actuarial basis for that decision, and no point of entry was given for affected insurers to question the decision. The benefit configurations in Petitioner's policy differ significantly from those in the Bankers Life policy from which Mr. Keating developed the published benchmarks. The differences in benefit configurations are material to the Subsection 627.9407(7)(c) comparison that Mr. Keating undertook. Mr. Keating used unpublished information in performing the comparison, and he could not recall the underlying methods and assumptions in making the comparisons. Therefore, some doubt was cast as to their validity. Further, no affected insurers were given a point of entry to question the comparisons or their underlying assumptions. The greater weight of the evidence shows that the policy decisions made by Respondent in implementing and applying Subsection 627.9407(7)(c), Florida Statutes, in many respects are not supported by logic or critical facts. Petitioner offered facts to demonstrate that Respondent's intended implementation and application of amended Subsection 627.9407(7)(c), Florida Statutes, would impair Petitioner's existing contracts, and would violate due process of law. The factual findings in this regard are set forth below. Petitioner's existing contracts were entered into at least nine years before amended Subsection 627.9407(7)(c), Florida Statutes, was proposed and became law, and before Respondent proposed to apply its benchmark charges to Petitioner. Petitioner's contracts are guaranteed-renewable contracts. Petitioner must continue to renew them indefinitely. When Petitioner entered into these contracts, the Laws of Florida, which were incorporated into the contracts, provided that Petitioner had the right to receive premiums for such guaranteed-renewable policies at rates actuarially justified under the provisions of Section 627.410, Florida Statutes, and the tests in Florida Administrative Code Rule 69O- 149.005(2)(b)1. Petitioner has demonstrated that the proposed rates in question are actuarially justified and meet those tests.
Recommendation Based upon the foregoing Findings of Fact and Conclusions of Law, it is RECOMMENDED that Respondent issue a final order approving Petitioner's rate increase request of 25.75 percent. DONE AND ENTERED this 8th day of June, 2007, in Tallahassee, Leon County, Florida. S ROBERT S. COHEN Administrative Law Judge Division of Administrative Hearings The DeSoto Building 1230 Apalachee Parkway Tallahassee, Florida 32399-3060 (850) 488-9675 SUNCOM 278-9675 Fax Filing (850) 921-6847 www.doah.state.fl.us Filed with the Clerk of the Division of Administrative Hearings this 8th day of June, 2007.
